What does section 95 of the Inheritance Tax Act 1984 do?

Section 95 provides an offset where an individual is a participator in both the close company making a transfer of value and the company whose estate increases as a result. The offset reduces the individual's deemed transfer of value under section 94, preventing double taxation on value that has effectively returned to them through the transferee company.

How is the offset amount calculated under IHTA 1984 section 95?

The increase in the transferee company's estate is identified as the portion of the value transferred that accounts for it. This amount is then apportioned among the transferee company's participators according to their rights and interests immediately before the transfer. The share apportioned to the individual through the transferee company becomes their offset amount.

Why is the section 95 offset needed in United Kingdom inheritance tax law?

Without the offset, an individual holding interests in both the transferor and transferee companies could be taxed on the full apportioned value from the transferor, even though part of that value has effectively come back to them through their interest in the transferee company. Section 95 prevents this unfair outcome by reducing the section 94 charge accordingly.

Can you give an example of how the section 95 offset works in practice?

If Mr Green owns 40% of Alpha Ltd and 30% of Beta Ltd, and Alpha Ltd transfers £100,000 increasing Beta Ltd's estate by £80,000, Mr Green's deemed transfer under section 94 is £40,000. His offset under section 95 is £24,000 (30% of £80,000), reducing his net chargeable amount to £16,000.

Inheritance Tax Act 1984 section 95

Participator in two companies

Section 95 deals with the calculation of the offset amount where an individual has an interest in both the close company making a transfer of value and the company whose estate increases as a result of that transfer.

Where a close company (the transferor) makes a transfer of value that increases the estate of another company (the transferee), and an individual who is apportioned part of the value transferred also has an interest in the transferee company, special offset rules apply.
The increase in the transferee company's estate is calculated as the portion of the value transferred that accounts for that increase.
That increase is then apportioned among the transferee company's participators according to their respective rights and interests immediately before the transfer, with further sub-apportionment through chains of participators where necessary.
The amount apportioned to the individual through the transferee company is treated as the offset amount — that is, the amount by which their estate has increased as a result of the transfer — which reduces the inheritance tax charge under section 94.

Access full legislation.And much more.

By becoming a member, your team gets full access to Tax World research tools and source-backed tax resources.

Become a member