We have assumed that:
- The individual is domiciled in the UK and the shares in the company are UK situs property, and
- The individual does not pay full market rent for the occupation of the property
The reservation of benefit treatment of a disposition for inheritance tax (IHT) purposes arises, by virtue of section 102(3) of the Finance Act 1986 (FA 1986), where an individual disposes of property by way of gift and either:
- Possession and enjoyment of the property is not bona fide assumed by the done, or
- The property is not enjoyed to the entire exclusion, or virtually to the entire exclusion, of the donor and of any benefit to them, whether or not that benefit is secured by contract
The individual who currently owns the shares in the company has no right to use or occupy the property owned by the company, unless rent is paid or unless the company grants them the right to use it. In the latter case, the individual would receive a benefit which may either be taxable as earnings by virtue of the Income Tax (Earnings and Pensions) Act 2003 if the individual is an employee or office holder. If not, the grant of the use of the property may amount to a distribution by the company and be taxable in the hands of the individual.
If the individual were to make a gift of 90% of the shares, those income tax charges would continue to apply in the same way, on the value of the benefit received.
Assuming that no rent is paid by the individual and the individual would have no other right to occupy the property held by the company, the individual would not enjoy any rights in relation to the property after making the gift which they enjoyed before making the gift. The shares which are given away, unless they are a specific class of shares which attribute certain rights in relation to the property to the shareholder, would not give any right of occupation of the property.
The ‘property’ to which FA 1986, s 102(3) refers would, in this case, be the shares which are given away, not the property owned by the company.
There would therefore be no reservation of benefit for IHT purposes.
HMRC appear to agree with this conclusion, see IHTM14334 Gifts with reservation (Gwrs): The Reservation: Examples of exclusion of the donor.
If you would like a chat to discuss further, please feel free to contact me for a free 30-minute consultation.
01637 800 306