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HMRC internal manual

Inheritance Tax Manual

Finance (No 2) Act 2017 changes: close companies and partnerships

Example 1

Lee is not domiciled or resident in the UK and never has been. He owns the entire share capital of a Jersey company, whose sole asset is a leasehold flat in London. The open market value of the shares is £2m.

Until April 2017 this would have been excluded property (IHTM04251) because the shares are not located in the UK and Lee is non-domiciled. So, there would not have been an Inheritance Tax (IHT) charge if he had gifted those shares or had retained them (and his foreign domicile) until his death.

The effect of the new rule is that the shares are no longer excluded property and because the value of the shares is wholly attributable to a UK residential property interest (UKRPI) the full value of £2m is within the scope of IHT.

So, if Lee gifts the shares or dies then a lifetime charge or charge on death may arise subject to any available reliefs or exemptions.

Example 2

As example 1 except that Lee has, in 2000, gifted his shareholding into a discretionary trust. That property would have been excluded property because Lee was not domiciled in the UK when the settlement was made. The effect of the new rule is that the shares cannot be excluded property from April 2017 and are therefore subject to exit and anniversary charges.

If the facts are the same in 2020 then £2m will be taxable on the trust’s 10-year anniversary. But relief is available for the period – broadly the 7 years between 2010 and 2017 – that the shares were excluded property under the old rules. So, the rate of tax would not exceed 1.8% (3/10 x 6%).

If Lee is a beneficiary of the trust then the gifted property may also be property subject to a reservation (IHTM14301) and taxable on his death.

The amount brought within charge cannot exceed the ordinary open market value of the shares (or partnership interest or loan). There is no change in the methodology for establishing that value and discounts will be available on the same basis as they are given, or not given, at present. However, once this value has been ascertained then the question is the extent to which that value is attributable to a UKRPI and not to any other type of asset, wherever located, as shown in the next example.

Example 3

If the Jersey company in example 1 above also owned £18m worth of other assets, such as UK PLC shares worth £10m and a factory in Manchester worth £5m and some land in Italy worth £3m then the value attributable to the UKRPI would be 10% of the open market value of the shareholding. It is only that value that is brought within the charges to IHT.

The liabilities of the company are spread evenly across all of its assets according to the value of the assets irrespective of whether they are secured on any particular asset.

Example 4

If the company in example 3 above has liabilities of £2m and they are secured by a charge over the UKRPI then the attribution of value is not nil. It is still 10% of the open market value of the shareholding.

The UKRPI may be held indirectly through other companies (or partnerships).

Example 5

If in example 3 the UK RPI is not owned directly by the close company in which Lee had a shareholding (the top company) but by a subsidiary then the new rules still apply. If that subsidiary was wholly-owned and owned only the UKRPI then the attribution would be 10% as before.

But if that value of the stake in the top company (or subsidiary) is too small, defined as less than 5%, then the new rules do not apply. But in establishing whether this de minimis exclusion applies it is necessary to include the value of other stakes in the close company or partnership that are held by a connected person, e.g. a spouse or an aunt. If the combined stake is 5% or more in value then the de minimis exclusion does not apply.