5.3 Under the provisions of Section 202(1)(a), IHTA, the liability for the tax falls primarily on Great Ashfield Properties Limited. If that company does not pay the tax in the allotted time, it becomes payable by Mr and Mrs Barker and by their son. The allocation of the primary charge on the company is consistent with the grossing up treatment provided for in Section 94 in the above example. 5.4 If the shares in Great Ashfield Properties Limited had been sold, the Buyer would be concerned to make recovery of the inheritance tax that was payable by the Company from the Sellers. Again, this is an area of some concern for the Buyer as it is very possible that he has no knowledge of the tax liability and it is also very likely that provision for the tax would not have been made in the financial statements. 5.5 The other provision relating to close companies in IHTA is Section 98, IHTA dealing with alterations of share capital: by way of an example, Wickham Skeith Investments Limited has 100 shares held equally by Mr Brown and Mr Green. The company has an aggregate value of £10 million. If the company issues shares at par to the son of Mr Brown and to the daughter of Mr Green, this will be treated as a disposition made by the shareholders. Under Section 98, the company is not liable for the IHT: the persons liable for the tax are determined under Section 199 IHTA as Mr Brown and Mr Green, the son and the daughter, and any person in whom the property (that is the shares in question) is vested at any time after the transfer. 5.6 In respect of both Great Ashfield Properties Limited and Wickham Skeith Investments Limited, the transactions are not potentially exempt transfers and therefore IHT is immediately payable. 5.7 The next IHT charging event to be considered is death: under Section 200 IHTA the IHT which crystallises on death is payable by the persons in whom the property is vested at any time after the death. However, Section 200(2) states that a purchaser of property shall not be liable, unless the property is subject to an Inland Revenue charge. 5.8 The procedure for the Inland Revenue charge is set out in Section 237 IHTA: a charge can be imposed in respect of unpaid IHT on the property transferred. If the property was gifted within the 7 years of death, and was then sold, before the transferor’s death, it is not subject to the Inland Revenue charge. 5.9 If the property is owned by a company and the shares in the company are then sold, the charge is still valid: the sale of the shares would not have had any impact on the Inland Revenue charge. 5.10 Section 238 provides that property other than land which is disposed of to a purchaser who had no notice of the facts giving rise to the charge, shall cease to be subject to the charge, but the property representing it (that is the proceeds of sale) shall be subject to it. If the directors were aware of the charge before the sale of the shares to the Buyer, then this clause does not provide any protection to the Buyer.
5.11 Due to the potential liabilities detailed above, the Buyer will seek the protection of the tax covenant, so that the Covenantors are liable for such tax.
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