IHTM04314 - Finance (No 2) Act 2017: disposals of company interests, partnership interests, relevant loans and repayments of relevant loans

If an individual or a trustee disposes of

  • partnership interests or participator’s rights (or shares) or loans, or
  • receives a repayment of a relevant loan

there is a two year restriction on the availability of excluded property (IHTM04251) for the disposal proceeds or any property representing those proceeds. Note that this does not apply to a disposal of the UK residential property interest (UKRPI) itself, i.e. if the UKRPI is sold and the loan repaid then this 2 year restriction does not apply. That is because the loan ceases to be a relevant loan when the UKRPI is sold and so the repayment is not in respect of a relevant loan.

The amount so restricted is the lower of the value at the date of disposal (or repayment) or the value at the date of charge.

There is no Inheritance Tax (IHT) charge on the ending of the two year period.

Example 1

Alice is not resident and not domiciled in the UK. She has an interest in a foreign close company, the value of which is wholly attributable to UKRPI. In January 2018 she sells her stake in the company for the open market value of £1m, which is deposited in her Jersey bank account. Later she invests the proceeds in land in Spain. In November 2019 she gifts the land to her children at its then value of £1.2m. The gift is not of excluded property because it is derived from the proceeds of the disposal of her stake in the company and the disposal was made in the two year period. It is a potentially exempt transfer by Alice and the value transferred is capped at the value of £1m.

The same would apply even if Alice invested the proceeds in property that would otherwise be excluded property or left out of account under different rules. In particular

  1. an authorised unit trust (IHTM04262)
  2. UK government securities (IHTM04291)
  3. a qualifying foreign currency account. (IHTM04380)

Example 2

If the shares in example 1 were held by Alice as a trustee of a discretionary trust (or any other form of relevant property trust) then the proceeds would continue to be relevant property for two years. So, if the trustee appointed the land to the children in 2019 a proportionate charge would arise. Relief against the rate of tax is available to reflect the period, e.g. prior to April 2017, that the shares had been excluded property under the rules then in force.

Example 3

Alice made a loan to a family trust in 2016 of £2m. The trustees invested half the money in residential property in the UK via a wholly owned company. In 2019 the trustees repaid the loan (while continuing to own the UKRPI via the company) and Alice retained the proceeds. Half is excluded property immediately and the remainder can be excluded property again in 2021 and no IHT charge would arise at that time. But if she died in 2020 then £1m would remain in her estate. If the company sold the property then the loan would immediately become excluded property whether or not repaid at that point.