“Our client is a director and the sole shareholder of a UK company and has engaged us to consider his Inheritance Tax (IHT) position ahead of the forthcoming changes to Business Property Relief (BPR) in April 2026. The client currently has a credit director’s loan account (“the Loan”) owing to him from the company and as part of the IHT planning we want to consider the IHT implications of assigning the Loan to his adult children. No interest is being charged by the client on the Loan.”

All references below are to IHTA 1984 unless stated otherwise.

 

Before entering into the assignment and as part of the IHT planning you should check if your client has made a Will. If they have a Will a review of its terms is recommended to ensure that this does not conflict with the terms therein, especially in respect of the assignment of the Loan.

 

The Loan is a chose in action, an asset which is recoverable by legal action. Contract Law and Company Law are not within the scope of this advice and so, your client will need to seek legal advice. Our understanding is that a legal assignment needs to conform with s136 Law of Property Act 1925. Failing the conditions of s136 LPA 1925, means that there is an equitable assignment which can have repercussions when enforcing this debt. For the purposes of this article, we will assume that it will be a legal assignment.

 

Once the legal hurdles have been overcome, we can consider the IHT implications of the assignment. At present the Loan is within your client’s IHT estate being “the aggregate of all the property to which he is beneficially entitled” (s5).

 

Assigning the Loan to the children will be a disposition for IHT under s3 but will be a Potentially Exempt Transfer (PET) under s3A.This means that the transfer will be an exempt transfer if your client survives seven years or more after making the PET. However, if your client dies within seven years this becomes a chargeable transfer s3A(4)- a “failed” PET. The practical effect of a “failed” PET is that it can reduce or, if the Loan exceeds £375,000, wipe out all the available Nil Rate Band which will result in additional IHT to pay. It is important to note that whilst the IHT is computed in reference to the deceased estate, the gift recipient is primarily liable for the IHT due (s199(1)(b)) on the “failed” PET.

 

However, consideration should be given to the potential application of the Gift with Reservation (GWR) of benefit rules, with the key provision being in s102(1) Finance Act 1986. The main two conditions for GWR to apply are:

“…. this section applies where, on or after 18th March 1986, an individual disposes of any property by way of gift and either–

 

A.- possession and enjoyment of the property is not bona fide assumed by the donee at or before the beginning of the relevant period; or

 

B. at any time in the relevant period the property is not enjoyed to the entire exclusion, or virtually to the entire exclusion, of the donor and of any benefit to him by contract or otherwise;….”

 

If GWR applies, this would make the gift ineffective as the Loan will remain in your client’s IHT estate.

 

To satisfy s102(1)(a) it needs to be demonstrated that “possession and enjoyment” is bona fide assumed by the donee. These are composite requirements borne out of case law on estate duty (Commissioner of Stamp Duties of New South Wales v Perpetual Trustee Co Ltd [1943] AC 425). HMRC’s guidance in IHTM14332 states “The mere legal right to enjoy it is not sufficient”. If the funds from the Loan are tied into the company and cannot be extracted or “enjoyed” by the children condition 1(a) is satisfied meaning that the gift is within the remit of GWR. Therefore, strictly whether 1(b) is satisfied or not, does not matter. However, for completeness it is considered.

 

S102(1)(b) has two limbs, first is the property (the Loan) being enjoyed to the entire exclusion (or virtually to the entire exclusion) of your client and second, is there any benefit to your client by contract or otherwise? There have been two notable cases around (1)(b)- Hood v HMRC [2018] EWCA Civ 2405 and Buzzoni v HMRC [2013]. Both these cases confirm that the gift must be referred to the gifted property and consist of some advantage which your client did not enjoy before he made the gift. As a matter of fact, your client is not worse off whilst the Loan remains unpaid so there is no exclusion or virtual exclusion. In respect of the second limb, is there a benefit by contract or otherwise? There is arguably a detriment to the children as your client can still benefit from the dividends from the company which is still using the capital of the Loan.

To escape s102(1)(a), it is advisable for the Loan to be interest bearing as effectively this would mean the children will “enjoy” the income from the Loan. This is supported by HMRC in IHTM14332 which states “…the donee must in fact have had enjoyment of the gifted property, for example by occupying it or receiving the income produced by it.”. Amending the Loan should be documented and would recommend that Company Law advice is sought as to whether this could be in breach of your client’s fiduciary role as a director. From a benefit in kind perspective, s.201 ITEPA 2003 is wide enough to catch “a benefit or facility of any kind”. However, charging a commercial rate of interest should is not problematic because it is not a benefit or facility in that if the company borrowed externally, such a loan would most likely be interest bearing. Furthermore, as a matter of fact charging interest on funds lent would unlikely be a benefit “…by reason of the employment”.
In respect of s102(1)(b), the Loan should be repaid by the company as soon as it is possible.

 

Overall, our view is that a GWR risk remains whilst the Loan is outstanding. To minimise the risk, the terms of the Loan should be amended to ensure that it is repayable on demand, ensure that the terms are commercial and regular capital repayments are made by the company to the children.

 

In terms of other tax matters, from a Capital Gains Tax perspective, a simple debt is a chargeable asset and ordinarily a disposal to a connected person (s286 TCGA 1992) is deemed to take place at market value (s18 TCGA 1992). However, owing to s251 TCGA 1992 this will not result in a chargeable gain for your client.

 

For Corporation Tax, the Loan is a loan relationship (s302 CTA 2009) and will remain within this regime after the legal assignment, albeit with a new creditor. If the Loan is amended to become interest bearing, then the interest payable to the children will be an allowable debit, provided that a commercial rate of interest is charged.

To find out more about how this will affect your company and employees please contact your KKVMS advisor.