As the impact of the Budget 2024 changes sinks in, it is clear that asset transfers will feature heavily in the range of responses suggested to (or by) clients. Certainly, this is the case in some of the more imaginative proposals which have been suggested in social media! However, these “cunning plans” tend to ignore the impact of the various related party rules, which are intended to ensure that everyone is related to almost everyone to whom they might like to pass assets and hence market value is used instead of stated transaction value. It may therefore be useful to draw together the main rules, as extracted from HMRC manuals, for reference.
For individuals
A person is connected with an individual if that person is:
- the individual’s spouse or civil partner
- a relative of the individual
- the spouse or civil partner of a relative of the individual
- a relative of the individual’s spouse or civil partner
- the spouse or civil partner of a relative of the individual’s spouse or civil partner
Also:
- Except in relation to acquisitions or disposals of partnership assets ‘pursuant to bona fide commercial arrangements’, a person is connected with any person with whom he is in partnership and with the spouse, civil partner or a relative of any individual with whom he is in partnership
- Relative means a brother, sister, ancestor or lineal descendant. The term ‘relative’ does not cover all family relationships. In particular, it does not include nephews, nieces, uncles and aunts (but see further below).
For trustees
A person, in the capacity of trustee of a settlement, is connected with:
- any individual who is a settlor of the settlement,
- any person who is connected with such an individual, and
- any body corporate which, under TCGA92/S286 (3A), is deemed to be connected with that settlement.
Also:
- A settlor is considered to be connected with the trustee at the moment when property is put into the settlement
- For the purposes of determining whether a trustee is connected with an individual, the identity of the trustee is irrelevant. So, for example, if the trustee is the spouse or civil partner of the individual, he or she is only connected in his or her capacity as trustee if the case is within one of the three cases in CG14590.
- Although, under the tests outlined, an individual is not connected with particular trustees, this may not prevent him or her from being connected with a company controlled by the trustees. Under CTA2010/S454, a beneficiary of a trust can be attributed with the rights and powers of trustees. In such circumstances, he or she may control the company through the tests in CTA2010/S450 and hence be connected under TCGA92/S286.
For companies
A company is connected with another company:
- if the same person has control of both, or a person has control of one and persons connected with him (or he and persons connected with him) have control of the other, or
- if a group of two or more persons have control of each company, and the groups either consist of the same persons or could be regarded as consisting of the same persons by treating (in one or more cases) a member of either group as replaced by a person with whom he is connected.
Also:
- A company is connected with another person if that person has control of it, or if that person and the persons connected with him (including persons connected with him under CG14580) together have control of it
- Any two or more persons acting together to secure or exercise control of a company should be treated in relation to that company as connected with one another and with any person acting on the directions of any of them to secure or exercise control of the company. For this subsection to operate, it is not sufficient for the persons to have control of the company but the persons do have to act in some way to control the company. However, for example, exercising control could mean refraining from voting in a particular way and so enabling another person to win a vote, as well as by actually voting.
- Directors of a company are not necessarily connected persons in relation to transactions between themselves. Whether or not one of them controls the company or two or more together control the company, they are not connected persons unless they are ‘relatives’ or partners as above. TCGA92/S286 (7) makes two or more directors connected persons only in relation to transactions with the company.
- Great care is also needed if the asset is passed into a controlled company at undervalue. To the extent that connected parties benefit from the transfer, there will be a “deemed disposal” for IHT purposes – so, if one gifted an asset to a company jointly owned by the donor and his children, the consequential increase in the value of their shares would be a deemed chargeable transfer. Such a disposal is NOT treated as potentially exempt and, therefore, if it exceeds the £325,000 nil rate band, IHT will be payable immediately.
The above rules are primarily drawn from the CGT legislation but many will also apply to other taxes, including IHT (although values there are normally computed on the basis of loss to the estate) and, in some cases, SDLT, all of which need to be considered when a reorganisation is in hand.
Finally, if family members are not “relatives” as defined, there can still be a problem. In addition to the statutory definitions above, HMRC guidance to inspectors states that “where there has been a transaction between relatives who are not connected persons, say between an uncle and his nephew…you can still apply the market value rule if the transaction was otherwise than by way of a bargain at arm’s length”.
*the views expressed are the author's and not ICAEW's