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HMRC internal manual

Inheritance Tax Manual

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HM Revenue & Customs
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Lifetime transfers: transfers by close companies: alterations in share capital, loan capital or rights

An alteration made to a close company’s

  • unquoted share or loan capital,or
  • any rights attaching to its unquoted shares or debentures

is treated as

  • a disposition made by the participators (IHTM14851)

whether or not it would normally be treated as such for inheritance tax purposes - IHTA84/S98. This commonly arises where new classes of shares are created which are issued to existing shareholders in different proportions to how the exiting shares are held.

Example 1

A company has issued shared capital of 100 Ordinary Shares. Fernando owns 60 shares, Felipe owns 20 shares and Kimi owns 20 shares.

The company issues two further classes of shares:

20 Deferred shares (acquiring rights to votes and to 50% of the income and capital after 5 years) to Kimi.

80 20% Preference shares (absorbing much of the current income) to Kimi.

Although control remains with Fernando the value of his holding is substantially reduced and IHTA84/S98 is in point. A further claim under IHTA84/S98 will arise when the deferred shares actually acquire voting and other rights in 5 years’ time. Or when new shares are issued which vary the proportions in which the capital is held.

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Example 2

A company has issued shared capital of 1,000 shares. Roger owns 600 and Rafael owns 400.

300 shares are issued by the company to Novak and 300 to Andy.

Roger now has 600 out of 1,600 issued shares and has lost control.

Rafael’s interest has reduced from a 40% holding to 25%.