Trustee shareholdings and the small companies rate of corporation tax

For the tax planner there is much to be said for the family business being carried on through the medium of an unquoted trading company. Considerable IHT and CGT advantages may be attached to the shares in the company and, possibly, assets used by the company but held outside it. They may enjoy Business Property Relief for IHT purposes and qualify as Business Assets for CGT Tapering Relief. Such advantages can also be obtained if the business is carried on by a partnership, but one great advantage of the limited company is that it is relatively easy to transfer shares by gift, and to hold them on trust. Trustees are generally reluctant to become member of an unlimited trading partnership but will have fewer qualms about holding shares in a limited company. For the profitable family business however, trading through a company may offer an additional benefit. The Marginal rates of Corporation Tax are significantly lower than the marginal rates of income tax. This is especially so in relation to the smaller companies rate (20% on profits of up to £300,000) and the starting rate (10% on profits up to £10,000). Not surprisingly, there are anti-avoidance provisions to ensure that the small companies and starting rates are not exploited by splitting businesses up between large numbers of different companies which have one or more associated companies. The criteria for “associate companies” are widely drawn and may arise as a result of shares being held in trust. The consequence may be that two companies which are, in reality, quite independent of each other have to be regarded as “associated companies” and both lose the benefit of the advantageous rate of Corporation Tax. This has been confirmed by the House of Lords in R v CIR exp. Newfields Developments Ltd (2001) UK HL27 (2001 STC 901).