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Strategies for Private Company Shares To Avoid Inheritance Tax

Shared from Tax Insider: Strategies for Private Company Shares To Avoid Inheritance Tax
By Tony Granger, August 2015
Tony Granger examines owning private company shares and the possible availability of business property relief to escape inheritance tax.

There are many ways to own a business. Each has consequences for inheritance tax (IHT) purposes.   Sole traders on death, partners in a partnership and shareholders in a private company could qualify for business property relief (BPR) at up to 100% for IHT purposes on the transfer of relevant business assets.

Generally, private company shares are subject to IHT unless exempt or relieved. The ‘death’ rate of IHT is 40%. Subject to certain conditions, private company shares could qualify under BPR for IHT relief up to 100%. However this is not automatic. The first £325,000 (for 2015/16) of any estate is not subject to IHT.

Relevant business property must be held for at least two years in order to qualify for relief and comprises of:

Type

Rate of relief

A business or an interest in a business

100%

Unquoted shares

100%

Unquoted securities which on their own or combined with other unquoted shares or securities give control of an unquoted company

100%

Quoted shares which give control of the company

50%

Land or buildings, machinery or plant used wholly or mainly for the purposes of the business carried on by a company or partnership

50%

Land or buildings, machinery or plant available under a life interest and used in a business carried on by the beneficiary

50%


BPR is not available in respect of a business, or shares in a company that is:


not carried on for gain (not for profit or not on a commercial basis), or

subject to a contract for sale or being wound up.


‘Buy and sell’ or ‘double option’ agreements

A ‘buy and sell’ agreement on death is a contract for pre-sale, and loses any BPR; double or cross option agreements should be valid for BPR.


Tip:

Check your agreements for sale of a business on death.


Excluded activities for BPR:

  • There is no BPR broadly if the business is one of ‘wholly or mainly’ in dealing in securities, stocks or shares, land or buildings or in the making or holding of investments.
  • Investment income - a business which only generates investment income will not attract BPR, so this generally excludes a residential or commercial property letting business, a property dealing business and a serviced office business.
  • Property management, holiday businesses, property development - but mixed estates of (say) farming and letting may qualify, as well as caravan parks where (for example) there is letting, but the business is mainly holidays and caravan sales.


Trading activities

Trading activities qualifying for BPR include woodland management, farming (N.B. this may be subject to agricultural property relief) and sporting - shooting and fishing.


There are many traps and pitfalls for the unwary. For succession planning, the question is often asked whether private company shares should be retained until death and then sold or passed to others by will or by agreement.


Directors’ loan accounts

These do not qualify for BPR and are subject to IHT.


Tip:

Check directors’ loan accounts to see if they can be replaced with bank finance if required.


Investments

Investments in private company shares may qualify under the enterprise investment scheme (EIS) or seed EIS (SEIS) rules, and shareholders holding these shares (and certain AIM shares) may be eligible for full IHT relief after two years, including the growth in the shares. There is no limit to the amount of relief.


Tip:

If other investments are subject to IHT, consider SEIS or EIS shares and qualifying AIM shares to shelter your investments from IHT.


Sell or hold qualifying shares

If you sell qualifying business shares prior to death, BPR does not apply to the proceeds and would be liable to IHT. If facing IHT issues in your estate, it may be worth considering retaining shares that qualify for BPR, and selling investments that do not qualify, if cash is required.


Practical Tip:

Businesses change over time, so ensure that your business qualifies for BPR wherever possible.

Tony Granger examines owning private company shares and the possible availability of business property relief to escape inheritance tax.

There are many ways to own a business. Each has consequences for inheritance tax (IHT) purposes.   Sole traders on death, partners in a partnership and shareholders in a private company could qualify for business property relief (BPR) at up to 100% for IHT purposes on the transfer of relevant business assets.

Generally, private company shares are subject to IHT unless exempt or relieved. The ‘death’ rate of IHT is 40%. Subject to certain conditions, private company shares could qualify under BPR for IHT relief up to 100%. However this is not automatic. The first £325,000 (for 2015/16) of any estate is not subject to IHT.

Relevant business property must be held for at least two years in order to qualify for relief and comprises of:

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... Shared from Tax Insider: Strategies for Private Company Shares To Avoid Inheritance Tax
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