Company shares and inheritance tax
Many people work incredibly hard to build family businesses and when they sell them, they are so busy dealing with everything to do with the sale, that the inheritance tax (IHT) implications of the sale often pass them by.
Shares in family businesses which are trading limited companies are exempt from IHT provided they have been held for two years. When you sell your company you suddenly have a lump sum of cash in your estate which will be included when calculating IHT on your estate. Your estate has some allowances but after that IHT will be charged at the rate of 40% or, if you leave a certain amount to charity, at 36%.
If you are selling your business there are steps that can be taken to mitigate additional IHT liability.
IHT reduction planning post-sale
IHT planning can include making outright gifts. You generally need to survive seven years from a gift for it to fall outside your estate for IHT purposes, though if you make a gift into trust, you may sometimes have to survive 14 years for the gift to fall outside your estate. However, there are some gifts that can be exempt which includes gifts to charities, gifts totalling no more than £3,000 in one tax year, gifts to a specific individual or individuals where the individual does not receive more than £250 from you in a tax year.
There is also an exemption when gifts are made on a regular basis out of your excess income. There are rules around this exemption but it is a very valuable exemption that is often missed.
IHT reduction pre-sale
It may be better to place money into trust prior to sale rather than post-sale. Trusts have their own tax regime but putting money in pre-sale can allow the use of multiple trusts created on successive days to reduce the ongoing tax charges on the trust. It is important however that trusts are entered into as early as possible in the transaction as once there is a binding contract for sale the tax benefits of the multiple trusts will be lost. There is a risk that this could even be lost once heads of terms are agreed for the sale hence why it is important to do this as early as possible.
On death if you hold company shares, these will be exempt from IHT by way of business relief (BR) if the shares are in a trading limited company and have been held for two years.
If you die and you leave the shares to your spouse then the IHT savings may be lost as everything passing to your spouse is exempt in any event. If your spouse keeps the shares until their death then BR may well apply on their death so the relief has not been lost.
However, if your spouse sells the shares, for example to other shareholders and the cash is then in your spouse’s estate, that cash will be subject to IHT on their death so BR will have been lost.
One option would be to leave the share direct to the ultimate beneficiaries but this could leave your spouse in need, therefore a discretionary trust over the shares is often the best option.
Care also needs to be taken with shareholders’ agreements to ensure that they do not scupper BR on death. Provisions compelling a surviving shareholder to buy the deceased’s shares could cause a problem.
For more information please contact our Wills team on 0800 2800 421 or get in touch here.