Avoiding a CLT on a transfer to an offshore company

One of the often overlooked implications of a transfer to an offshore company is that it is a chargeable lifetime transfer ('CLT') for inheritance tax purposes. This arises because a PET only applies to a transfer to another individual. Therefore transfers to discretionary trusts or companies would be CLT's. The main impact of this is that there is an immediate charge to inheritance tax on the transfer based on the amount of the CLT. The charge is at 20%. Therefore as well as the CGT implications of a transfer to an offshore company, you should also bear in mind the potential inheritance tax charge based on the level of the assets transferred to the offshore company. However in many cases there will in practice be no CLT as there is no reduction in the value of the transferors estate. Reduction in value of estate Inheritance only applies to the "diminution in the value of the estate". Therefore if there has been no reduction in the transferors net estate there would be no value transferred for IHT purposes and therefore no IHT charge. In many cases the transfer to the offshore company will not result in a reduction in the value of the estate of the transferor as the value of the shares received will equal the value of the assets transferred to the company. Note that in the case of non UK domiciliaries (who are also not deemed UK domiciled for IHT purposes) a transfer of cash for instance from the UK to an offshore company would be a diminution in the value of their estate. This is because holding the cash via the offshore company would be exempt from IHT, whereas holding UK cash directly would be subject to IHT. Therefore non doms would need to be careful on a transfer to an offshore company. In addition other cases may lead to a diminution in the value of the transferors estate. For instance if you have a number of individuals transferring assets to a company a minority shareholding in a company may well be worth less than a share in the underlying assets transferred. However in such a case as this you'd be looking to argue that no transfer of value has been made because the transfer was a bona fide commercial transaction with no donative intent (then protected by S10 IHTA 1984).