Having to pay IHT on investment company shares on death
can have a serious impact on the company, particularly where the company is
closely held. Having elderly
shareholders of these companies is a high risk strategy! Fortunately for trading businesses and
companies, they have the potential to take advantage of that most precious of
reliefs – Inheritance Tax business property relief (BPR). At its most generous,
the relief makes unquoted shares in a trading company and interests in trading
businesses ‘invisible’ for IHT purposes.
That means that the shares can pass free of IHT to anyone on death.
It is not uncommon for the entrepreneur to be one half of
a married couple, while the other half has no real connection to the
business. Often for incorporated
entities, the plan at board level is that, if a director-shareholder dies, the
shares passing to their estate will be bought back by the company and the
director-shareholder’s family will receive cash instead of shares.
This sounds like a good deal for everyone but it creates a
very real IHT problem for the entrepreneur’s family, when shares worth millions
are exchanged for cash worth millions after the entrepreneur’s death. Suddenly, the family’s IHT exposure can
change dramatically for the worse. £5m
of trading company shares may have no IHT liability attached to them, thanks to
BPR. The heirs get £5m. On the other hand, £5m of cash has an IHT
liability of £2m. The heirs get only £3m
instead.
Planning for a tax that takes effect on death will never
be a major concern for busy forty- and fifty-something entrepreneurs (although
sadly we know from experience that the statistically unlikely happens). But married couple entrepreneurs can take a
quick and simple first step towards their IHT planning. The entrepreneur should always make a will
that leaves any assets qualifying for BPR to a discretionary trust for the
benefit of his surviving spouse and family (and ensure that no pre-emption
rights will prevent the business interest passing to it). Then if the business interest is turned into
cash after the entrepreneur’s death, it is not such a disaster for IHT
purposes. In effect, the trust preserves
the BPR relief for future generations, even after the business interest has
been swapped for cash, as assets left in the trust
will not suffer IHT at 40% on the surviving spouse’s death. Provided the choice of trustees has been
carefully thought through, the family will have a large pot of wealth in a
trust that they can easily dip into.
Most entrepreneurs
want future generations to benefit from at least some of the wealth that their
business success has generated. This
simple, will-based planning tool could make such a big difference to the level
of retained family wealth but, too often in the entrepreneurs’ wills that I
see, it is missing. And no one is
keeping an eye on whether the business is structured to maximise BPR
entitlement either. The IHT relief
available to trading businesses is so generous though, that IHT planning should
be featuring on more corporate agendas.
Entrepreneurs would be mad to miss out.
