Inheritance tax implications of gifting to a limited company?

chilswelluk

I am thinking about a scenario of a parent and son, where the son is a sole director of a Limited Company. The parent gifts the son’s company 400k. If the parent then dies within a year of making the gift, am I right in thinking that the company would bank the 400K without any tax implications? If this 400k would have otherwise have been subject to inheritance tax, then it seems it would be a favourable outcome for the son. I think one would be on dodgy ground if the prior intentions of this were to bypass inheritance tax, but if it was a genuine company that had already been trading for a number of years prior to the gift, I think that’s reasonable. In any case it would be very difficult for HMRC to prove intentions when the person who made the gift is dead. Am I missing something?

Yes the issue of corporation tax did cross my mind, but as I understand it, gifting to a Limited company is not subject to corporation tax, unless there is an existing trading relationship. This is explained here:

https://galleyandtindle.co.uk/is-a-gift-to-a-company-taxable/#:~:text=The tax position depends on,a “loan relationship” exists

“As a rule the recipient of a gift of money isn’t liable to pay tax on it – inheritance tax is an exception in some circumstances. However, that’s not always the case where the recipient is a company. The tax position depends on several factors, especially the relationship between the company and the giver.

HMRC’s view, which has been confirmed by the courts, is that if there’s a trading relationship between a company and an individual, business or other organisation that gifts it cash, the sum received is liable to CT. The justification for this is that the reason for making the gift must be linked to and be because of a trade arrangement. “

Ferro

The inheritance tax position is explained here:

https://www.taxinsider.co.uk/gifts-to-and-from-a-company-don-t-forget-iht-ta

Grumpy_chap

chilswelluk said:

I am thinking about a scenario of a parent and son, where the son is a sole director of a Limited Company. The parent gifts the son’s company 400k. If the parent then dies within a year of making the gift, am I right in thinking that the company would bank the 400K without any tax implications? If this 400k would have otherwise have been subject to inheritance tax, then it seems it would be a favourable outcome for the son. I think one would be on dodgy ground if the prior intentions of this were to bypass inheritance tax, but if it was a genuine company that had already been trading for a number of years prior to the gift, I think that’s reasonable. In any case it would be very difficult for HMRC to prove intentions when the person who made the gift is dead. Am I missing something?

Yes the issue of corporation tax did cross my mind, but as I understand it, gifting to a Limited company is not subject to corporation tax, unless there is an existing trading relationship. This is explained here:

https://galleyandtindle.co.uk/is-a-gift-to-a-company-taxable/#:~:text=The tax position depends on,a “loan relationship” exists

“As a rule the recipient of a gift of money isn’t liable to pay tax on it – inheritance tax is an exception in some circumstances. However, that’s not always the case where the recipient is a company. The tax position depends on several factors, especially the relationship between the company and the giver.

HMRC’s view, which has been confirmed by the courts, is that if there’s a trading relationship between a company and an individual, business or other organisation that gifts it cash, the sum received is liable to CT. The justification for this is that the reason for making the gift must be linked to and be because of a trade arrangement. “

Gifting to a Ltd Co is a rather unusual circumstance.  Particularly if that is a genuine private sector profit-generating Ltd Co.  I have said that second part to differentiate from gifting to a Ltd Co., where the Ltd Co. operates in the third sector / charitable purpose.  I do not believe from reading the OP that the third sector position applies here.

If an individual wished to introduce private capital into a Ltd Co., then the normal mechanisms for doing so are either a loan to the Ltd Co. (which will be expected to be paid back) or the acquisition of shares in the Ltd Co. (which would earn dividends and have some value, though "value" of a non-listed Ltd Co. can be hard to realise).
What would be the intention of an individual "gifting" a sum to a Ltd Co. rather than following a more conventional means of introducing the capital to the Ltd Co.?  (loan / shareholding)

Is the Estate of the individual gifting this money going to fall within IHT territory in the first place?

Has the individual considered potential Deprivation of Assets (DoA) if care is required or likely to be required?

I cannot see how the gift could be received by the Ltd Co. and not give rise to a Corporation Tax liability.  That gift would increase the balance sheet assets at the end of the trading period and therefore increased the balance on which the CT is assessed.
If the Ltd Co. has spent the value of the gift in operating the business (trading at a loss), or via drawings to the Director / Owner by way of salary / pensions contributions, that would avoid the CT but the normal salary taxes would have applied (of future income tax when the pension is eventually drawn).  The Director / Owner cannot have drawn the value of the gift as dividend (which would still give rise to tax liability for the individual) unless that dividend drawn has been declared as retained profits (hence after CT).

The quote you included about the relationship between the giver and the Ltd Co. only covers the scenario where the sum gifted is subject to CT.  Is there a further example that covers the Ltd Co. not liable to CT on the gifted sum?

I think, ultimately, this can't work as the OP suggests it might, otherwise the approach would be wide-spread and, possibly, no company would ever pay CT as all income would simply be declared by whichever company as "gifts".

More_complicated_than_that

chilswelluk said:

I am thinking about a scenario of a parent and son, where the son is a sole director of a Limited Company. The parent gifts the son’s company 400k. If the parent then dies within a year of making the gift, am I right in thinking that the company would bank the 400K without any tax implications? If this 400k would have otherwise have been subject to inheritance tax, then it seems it would be a favourable outcome for the son. I think one would be on dodgy ground if the prior intentions of this were to bypass inheritance tax, but if it was a genuine company that had already been trading for a number of years prior to the gift, I think that’s reasonable. In any case it would be very difficult for HMRC to prove intentions when the person who made the gift is dead. Am I missing something?

Yes the issue of corporation tax did cross my mind, but as I understand it, gifting to a Limited company is not subject to corporation tax, unless there is an existing trading relationship. This is explained here:

https://galleyandtindle.co.uk/is-a-gift-to-a-company-taxable/#:~:text=The tax position depends on,a “loan relationship” exists

“As a rule the recipient of a gift of money isn’t liable to pay tax on it – inheritance tax is an exception in some circumstances. However, that’s not always the case where the recipient is a company. The tax position depends on several factors, especially the relationship between the company and the giver.

HMRC’s view, which has been confirmed by the courts, is that if there’s a trading relationship between a company and an individual, business or other organisation that gifts it cash, the sum received is liable to CT. The justification for this is that the reason for making the gift must be linked to and be because of a trade arrangement. “

Yes, you are missing something.

A gift to a company cannot be a potentially exempt transfer for inheritance tax but is instead a chargeable lifetime transfer.  This means that 20% IHT is due immediately (after using up the balance of your £325,000 nil rate band).  If you pay the IHT then you'd have to gross up. More details can be found here: https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm04067  If you are a shareholder in the close company the rules are a bit difference for calculating the value of the transfer.

There could be more IHT if you died within seven years.  Any additional tax is due on death on any amount in excess of the unused nil rate band, charged at 40% (with credit given for the CLT tax and taper relief may be available after three years). A gift to the company is an unusual situation and so I've don't remember off the top of my head who is liable for it (probably your personal representatives but may be the company).

As far as corporation tax is concerned, I have no idea why you are making the gift and so I would be just guessing as to whether it is taxable or not (your intention is relevant, as is how it can be used). Your comment about "unless there is an existing trading relationship" is wrong.  For example, the Falkirk Ice Rink case says one is not needed.  My starting point would be that HMRC would say it is taxable.

I have no idea why you are doing this but a gift to a company that you don't own is not, normally a sensible thing to do from a tax perspective.