Corporate Munificence: Beware

• Published date: 03 December 2021
• Subject Matter: Corporate/Commercial Law, Tax, Corporate and Company Law, Contracts and Commercial Law, Inheritance Tax, Income Tax, Shareholders
• Law Firm: Berg Kaprow Lewis
• Author: Mr Anthony Newgrosh

Using your private company to make charitable donations can be sensible and tax-efficient: donations are simply deducted in arriving at taxable profit, circumventing the administrative complexities of Gift Aid; and you avoid the inefficiency of making personal donations out of remuneration that has previously suffered NIC.

But what if you want to use your private company to distribute largesse other than to charities?

The first hurdle may be a legal one: dissentient shareholders or creditors may legitimately object if you disburse the assets of a company on a whim. But in practice that difficulty may, for many private companies, be more theoretical than real. Moving on...

The first potential tax problem is with inheritance tax ('IHT'). A gift made by a company is likely to be a 'transfer of value'; and if the company is a 'close company' (broadly, under the control of five or fewer people) such a transfer of value is (in effect) treated as made proportionately by the shareholders. Furthermore, such a deemed transfer is, in principle, immediately chargeable: unlike most actual transfers made by individuals, it cannot constitute a 'potentially exempt transfer'.

The transfer of value is exempt if it's made to a charity or, subject to some conditions, to a political party (conditions which weren't, by the way, satisfied by UKIP in the case of Arron Banks [2021] EWCA Civ 1439). Nor is there a charge to tax if the transfer is made with no gratuitous intent or if the amount transferred is deductible in computing the company's profits or gains. And the same applies to some dispositions in favour of certain trusts for employees. But, subject to these provisions, a transfer of value by a close company can give rise to a charge on the shareholders.

In many cases IHT is not in practice a problem - or, at least, not an immediate problem - since the deemed transfer will often fall within the shareholder's nil rate band.

But that may not be the end of it.

If you procure that your company transfers money or value to...