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HMRC internal manual

Capital Gains Manual

HM Revenue & Customs
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Gifts to employee trusts: persons qualifying: other companies

TCGA92/S239 (4)

Companies which are not close are outside the scope of Inheritance Tax. Relief is due to such a company if

  • There is a disposal by the company of assets other than under a bargain at arms length.
  • The disposal is to trustees of a trust within Section 86 IHTA for the benefit of the employees of the company (and possibly their relatives and dependants).
  • Certain participators of the company are excluded from benefit under the trust.

An employee trust is within IHTA84/S86 if either:

  • It is for the benefit of persons of a class defined by reference to employment in a particular trade or profession, or their relatives.
  • It is for the benefit of persons of a class defined by reference to employment by or office with a body carrying on a trade, profession or undertaking.

To qualify under TCGA92/S239(4) the beneficiaries of the trust must include all or most of the employees or office holders of either the company or the company and one or more of its subsidiaries. This is a similar provision to IHTA84/S13(1).

The inclusion of charities among the beneficiaries does not affect qualification.

TCGA92/S239 (5) - (6)

The trust must not permit a participator in the company, or another company which has made a qualifying transfer to that trust, or a person connected with such a participator, to benefit from the trust unless the participator:

  • Would not be entitled on a winding-up of the company to 5 per cent or more of its assets.
  • Is not beneficially entitled to 5 per cent or more of any class of its shares.
  • Does not have rights entitling him to acquire 5 per cent or more of any class of shares.

Participator includes anyone who has been one in the past ten years.

In practice many employee trusts specifically exclude such persons from benefits. The wording of TCGA92/S239(5)-(6) is similar to that of IHTA84/S13(2)-(4) and IHTA84/S28(4)-(6).

Because TCGA92/S239(4) - (6) and the IHTA provisions are so similar you must consult with HMRC - IHT if you have any concerns about the application of TCGA92/S239(4) - (6). See CG 36101 for guidance on the procedure for contacting HMRC - IHT.