Most business people will know that inheritance tax (IHT) applies to the transfer of assets. If the transfer takes place on death the rate of tax is 40%. If the transfer takes place during lifetime the rate of tax is 20%, with a further 20% becoming payable if death occurs within seven years.
Business Property Relief
Shares in a private company are subject to IHT but there is a very valuable relief known as business property relief (BPR). If BPR applies then the shares can be transferred on death or during lifetime free of IHT.
To benefit from BPR:
- the company must be privately owned and the shares must be unquoted although an AIM listing is permitted;
- the shares must have been owned for at least two years;
- the company must carry on a trading business as opposed to an investment business. BPR is not generally available if the company wholly or mainly deals in land, buildings or investments;
- if a company operates both a trading business and an investment business BPR can be put at risk. In that case, consideration should be given to creating two separate businesses to save tax;
- a holding company with trading subsidiaries can qualify for BPR;
- any asset owned by the company but which has not been used wholly or mainly for the business during the last two years or which is not required for future business use, will not qualify for BPR. A high level of cash, for example, can cause problems unless there is clear and convincing evidence that it is required for future business purposes; and
- if the shares are subject to a sale contract no BPR is available. It is important to make sure that any shareholder agreement, providing for shareholders to purchase the shares of a deceased shareholder, does not result in a contract and loss of BPR.
Do not waste BPR
If the shares in your company qualify for BPR you should make sure that you do not lose the relief. You should have a professionally drawn will, keep it up to date and be aware of the following:
- leaving the shares to your spouse is best avoided because if the shares are sold after your death the cash from the sale will be subject to a 40% tax charge on their death;
- leaving the shares to your children might not be an option either. It might result in your spouse not being sufficiently well provided for, your children may be too young or have an unstable marriage, or there may be issues around their respective levels of involvement in the business;
- dividing your estate between your spouse and children will waste part of the BPR and make the tax position worse for your children;
- a solution is to leave the shares to a family trust for the benefit of your wife spouse and children. The shares can either remain in the trust or be transferred to your children without IHT. If the shares are sold after your death the cash from the sale will sit within the protection of the trust and be free of IHT if your spouse dies; and
- your spouse can even buy the shares from the trust and use BPR twice.
You may also consider making a gift of some of your shares during your lifetime whilst the IHT regime remains favourable. A managed transition of share ownership to the next generation can be useful if the company is to be sold or if it might diversify in to investment activities. Using a family trust offers greater security and control than an outright gift yet can achieve the same IHT benefits.
If you would like further information or to discuss anything arising from this update please contact Keith Hately our Private Client Partner and a member of STEP Business Families Special Interest Group on 0191 2117928 or [email protected].
At Muckle LLP we provide commercial advice to people in business on wills, trusts and inheritance issues. We will work with your existing professional advisors in accountancy, tax and financial services so that you receive the best all round advice.