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HMRC internal manual

Inheritance Tax Manual

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HM Revenue & Customs
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Employee benefit trusts: dispositions by close companies: definition of close company

A ‘close company’ is defined for IHT by IHTA84/S102 and essentially means a company which would be a close company within the meaning of the Corporation Tax Acts.

Apart from specified exceptions it is:

  • a UK company in broad terms controlled by

    • either five or less participators (individuals or bodies corporate) or
    • by participators (however many there are) who are directors. A participator is defined by FA72/S303 as anyone who possesses or is entitled to acquire share capital or voting rights in the company. It can also include a loan creditor.

A quoted company may be close at a time when the voting power possessed by all its principal members exceeds 85% of the total voting power in the company. Even where its principal members hold less than 85% of the voting power, such a company may still be close where less than 35% of its voting power is held by the public, CTA2010/S446.

For Inheritance Tax purposes, the definition can apply to a non-UK company, if that company would be regarded as a close company if it was resident in the UK.

A company can also be regarded as close if more than half of the income which can be apportioned under a shortfall direction can be apportioned to five or fewer participators.

However, a company is not to be regarded as close if controlled by a company which is not itself a close company, or by two or more companies none of which is a close company.