Inheritance Tax – Owning Shares In Your Company

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Mark Stemp
Tax Director
Crowe Clark Whitehill
mark.stemp@crowecw.co.uk

Most of us prefer not to think about death, but as we know, death and taxes are two certainties in life.  Dying while holding shares in your own company can produce an inheritance tax bill, but it may be difficult for your heirs to raise the funds in order to meet the liability.  Putting a contingency plan in place can be simple but needs to be done before you die.


Inheritance Tax on shares

When you die, your assets are valued for inheritance tax.  After deducting liabilities, there are a number of reliefs which can be set against the net estate to reduce the amount which is charged to inheritance tax.  After deduction of reliefs, we each have a nil rate band of £325,000.  The balance of the estate is then charged inheritance tax at 40%.

It is possible that shares in a company can attract an inheritance tax relief called Business Property Relief.  The relief is set against the value of the shares so they can become free of any inheritance tax.  There are a number of conditions that apply but the main ones are that the shares need to be owned for at least two years, be in an unlisted company and the business carried on by the company must be trading.

The trading requirement can catch out business owners.  This is often because they have a property rental company or their trading company has accumulated profits which are used to buy investment properties or a portfolio of shares.  Business property relief is therefore restricted or even lost entirely.


What you can do about it

If you have investments within your company, you may want to think about making changes so that your shares qualify for Business Property Relief.  The tax advantage can be significant, as shares worth £250,000 could attract a 40% tax bill of £100,000.  With some careful planning this can be saved.

There are a number of investments that can qualify for Business Property Relief.  These are usually investments into a trading business, such as some property development businesses and various trading partnerships.

Those that prefer to take the risk that inheritance tax could become payable, perhaps thinking they are too young to consider planning,  may want to consider life insurance so that funds are available for their heirs to pay the tax.  Few are aware that inheritance tax, where due on own company shares, can be paid over ten annual instalments.


Practical aspects

If you are married, a spouse exemption is available on the transfer of shares to your spouse.  This means that the shares can pass free of inheritance tax and capital gains tax, even where business property relief is not available.  Would it be in the best interests of the company for your spouse to own the shares?  It may be an opportunity, particularly if business property relief is available, to transfer the shares to other family members such as children or other key members of the company.

For a discussion regarding your company please contact Mark Stemp at Crowe Clark Whitehill on 0118 959 7222 or by e-mail mark.stemp@crowecw.co.uk

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