Close Company IHT: When Your Company's Actions Create Your Personal IHT Liability
Under ss94–98 IHTA 1984, a close company's transfer of value is treated as a proportionate transfer made by each shareholder. The company writes off a director's loan — each shareholder is deemed to have made a transfer. The company pays a premium on a family policy — each shareholder is treated as transferring value. Most business owners are unaware these rules exist until HMRC raises an enquiry.
When the Close Company Rules Are Triggered
Director's loan write-off by the company
If a close company writes off (forgives) a loan made to a director who is also a participator (shareholder), the write-off is a transfer of value by the company — value passes from the company to the director without consideration. Under s94-98 IHTA, this transfer of value is apportioned to all participators in proportion to their shares in the company. The shareholder who received the loan benefit may face an IHT charge on their proportionate share of the value transferred — not just the director who benefited from the loan write-off. If the company has 5 equal shareholders and one director's loan of £100,000 is written off, each of the 5 shareholders is treated as making a £20,000 transfer of value for IHT purposes.
Company paying premiums on a life insurance policy for a participator's benefit
If a close company pays premiums on a life insurance or critical illness policy where the benefit is payable to or for the benefit of a participator (rather than being a genuine business asset — for example, keyman policies with proceeds payable to the insured's family), the premium payments may be a transfer of value under s94-98. The participator whose family benefits is treated as having made a proportionate transfer of value equal to their share of the company's premium payment. Business-related keyman policies (where proceeds are payable to the company, not the individual's estate) are generally not affected — the issue arises where the policy economically benefits the participator or their estate.
Gratuitous trading terms with connected persons
If a close company contracts on artificially favourable terms with a connected person (for example, selling goods or services below market value to a family member of the controlling shareholder, or purchasing services at above-market rates from the shareholder's family members), this is a transfer of value for IHT under s94 — the company has transferred value to the connected person without consideration. Each participator is treated as making a proportionate transfer of value. The more commercially unjustifiable the terms, the more likely HMRC is to argue a transfer of value has occurred.
Company entering into a discretionary trust arrangement for employees
If a close company contributes to an employee benefit trust (EBT) or other trust for the benefit of participators or connected persons in a way that is not fully commercial, HMRC may treat the contribution as a close company transfer of value under s94-98. The boundary between a legitimate employee benefit arrangement (not a transfer of value) and a close company arrangement designed to benefit the controlling shareholder's family (treated as a transfer of value) is fact-specific and contested. Specialist advice is needed for any EBT or employee trust structure involving a close company with family shareholders.
Frequently Asked Questions
What is a close company for IHT purposes?
A close company is defined in ss439-440 Corporation Tax Act 2010 (the IHTA incorporates this definition). Broadly, a company is close if it is controlled by five or fewer participators, or by any number of participators who are also directors. Most family-owned companies and small businesses are close companies. A participator is a person who has a share or interest in the income or capital of the company — this includes shareholders, loan creditors (in some cases), and persons with options over shares. HMRC's IHT Manual (IHTM25000 onwards) sets out the detailed rules.
Are all close company transfers of value treated as participator transfers?
No — s94 IHTA only applies to a transfer of value made by a close company if the transfer is not an exempt transfer (such as certain employee benefit trusts meeting the statutory conditions). Additionally, a transfer of value by a close company is not treated as a participator transfer where: (1) the transfer is made in the ordinary course of the company's business (i.e. it is a commercial transaction); (2) the transfer would not reduce the value of the company's estate if carried out by an individual; or (3) the transfer is to another close company that is a member of the same group. The key exemption is commercial purpose: if the company acts as any ordinary commercial company would in similar circumstances (e.g. writing off a bad debt genuinely, not as a gratuitous arrangement), the participator rules may not apply.
How is the IHT charge on the participator calculated under s94-98?
The transfer of value by the close company is apportioned between all participators in proportion to their rights and interests in the company (broadly, their shareholding percentages). Each participator is treated as making a proportionate transfer of value equal to their share of the total amount transferred by the company. This deemed transfer is a transfer of value for all IHT purposes: (1) it is cumulated with the participator's own transfers of value in the 7-year running total; (2) it uses up the participator's NRB; (3) if the participator dies within 7 years of the deemed transfer, it may become a failed PET or trigger a clawback of BPR. Reporting: the participator must report the deemed transfer to HMRC on a return if it is a chargeable transfer or exceeds the annual exemption.
Is there a de minimis or commercial exemption that protects small transfers?
Section 94(2) IHTA provides that the participator rule does not apply to transfers that are part of the ordinary commercial operations of the company — transfers that any similar company, acting for purely commercial reasons, would make. This exemption protects genuine trading transactions, normal employment terms, and commercially justifiable arrangements. However, it does not protect transfers made specifically to benefit the participator's estate or family without commercial justification. There is no specific de minimis threshold, though HMRC's resources are focused on significant arrangements rather than minor commercial variations. The annual exemption (£3,000) may shelter small deemed transfers.
How does the participator transfer interact with BPR on the company shares?
The close company participator rule creates a deemed transfer of value by the participator — a different event from the participator simply owning shares in the company. The deemed transfer is not itself qualifying business property (BPR applies to the underlying shares, not to deemed transfers under s94). However, where a participator holds shares in the close company that would qualify for BPR, and the participator's shares are subsequently transferred (on death or as a gift), BPR can apply to the share value in the usual way. The s94 deemed transfer does not disqualify the participator's shares from BPR — but it does use up some of the NRB, potentially exposing more of the estate to IHT at 40%.
What steps can business owners take to avoid triggering the close company participator rules?
Key steps: (1) Document the commercial justification for any payment, loan write-off, or contractual arrangement that benefits a connected person — if the arrangement is genuinely commercial, the s94 exemption should apply; (2) Avoid writing off director/participator loans gratuitously — either formally document the debt as a bad debt (with evidence of genuine inability to repay) or restructure as a dividend or salary before writing off; (3) Ensure keyman or death-in-service policies are structured so proceeds go to the company (not the participator's estate) — review any existing policies; (4) Keep EBT and trust arrangements on commercial terms with objective beneficiary selection; (5) Take specialist IHT advice before any unusual or gratuitous transaction between the company and a connected person. The s94-98 rules are often overlooked by business advisers focused on income tax and corporation tax — but they create real IHT exposure.
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