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HMRC internal manual

Inheritance Tax Manual

Close companies and settled property: close company entitled to interest in possession

Where a close company (IHTM14851) is entitled to an interest in possession (IHTM16061) in settled property the persons who are participators in the company shall be treated for the purposes of this Act (except IHTA84/S55) as being the persons entitled to that interest according to their respective rights and interests in the company - IHTA84/S101 (1).

The effect of this is that where a close company has an interest in possession under a trust, the interest is attributed to the individuals who are participators in the company. This can cause problems, because the individual(s) may die without anyone noticing that this obscure (and presumably rare) interest exists. On the death of a person who is a participator a claim arises in the death estate, to the extent of his interest, on the interest in possession property under IHTA84/S4 with IHTA84/S49 (1). As it is mandatory to consult Shares and Assets Valuation (SAV) on close company transactions at an early stage, you should ensure that the possibility of such a situation is clearly put on the agenda for SV, and you, to consider in depth.

A lifetime claim against a participator in such a case is not a PET (IHTM04057), IHTA84/S3A (6). We allow exemption under IHTA84/S53(2) if, immediately on the chargeable event, the company becomes entitled to the property or to another interest in possession in it (on the same basis as for ‘a person’), and we allow IHTA84/S52 (2) treatment where the company disposes of its interest for consideration - both under Statement of Practice SPE5 .

In cases where a company has the interest in possession and IHTA84/S101 (1) applies, a death claim will arise (proportionately) against any member of the participant company who dies, as the company’s continuing interest in possession is attributed to the individual interest in possession via that company.