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HMRC internal manual

Shares and Assets Valuation Manual

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HM Revenue & Customs
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Inheritance Tax: Close Companies - Alterations in Share Capital - s.98 IHTA 1984

Section 98 serves to stop avoidance by the alteration of a company’s capital or the rights attaching to it. It achieves this by treating the alterations as if they had been effected by dispositions made by the participators (normally the shareholders). To give rise to a liability one is looking for a situation where, after the company has altered its capital or varied share rights, the value of an individual’s holding after the event is less than it was before. A common case involves the creation of new classes of shares which are not issued pro rata to existing shareholders.

Example 1

A company has issued share capital of 100 Ordinary shares owned as to 60% by A, 20% by B and 20% by C.

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 C

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

Although control remains with A the value of his holding is substantially diminished and s.98 is in point. A further claim under s.98 will arise when the deferred shares actually acquire voting, and other, rights in 5 years’ time or new shares are issued which vary the proportions in which the capital is held.

Example 2

A company has issued share capital of 100 shares owned as to 70% by X and 30% by Y.

The company makes a 2 for 1 rights issue which is not wholly taken up by the controlling shareholder.

[This is not as clear-cut as example 1 because X’s new holding may range from 70% if he takes up almost all his rights to 43% is he takes up none. In addition, when a rights issue is involved there may be an absence of gratuitous intent (which it will be for the taxpayer to prove) so that s.10 may be in point.]

Example 3

A company has issued capital of 100 shares, 60 of which are owned by A, 30 by Mrs A and 10 by B.

100 further shares are issued to B at a nominal price well below market value.

It should be noted that for the purpose of looking at close company transfers, the related property provisions are not in point.

Example 4

A company has issued capital of 100 shares, of which W owns 60 and X 40.

30 shares are issued to Y and 30 to Z.

W now has 60 out of 160 issued shares and has lost control.

X now has 40 shares as a 25% holding compared to his former 40 shares as a 40% holding.

  Additional Guidance: SVM150000