DIRECTORS’ TAX - 31.01.2007

Passing on the family business

The waiting game

The scenario. In the past, one of the major problems with passing on the family business was that the owners/directors frequently put off action until nearing retirement. However, doing nothing could result in an enormous tax bill in a few years’ time. The market value of your shares in the company is included in your estate for calculating Inheritance Tax (IHT) - currently 40% on estates worth over £285,000. You’ll have read that with rising property prices more and more of your estate could end up being taxed at 40%.

For example, the current IHT-exempt amount stands at £285,000. If the value of your house (assuming your mortgage has already been paid off) is £250,000, your company is worth £120,000 and other assets £50,000, the IHT bill if you departed tomorrow would be about £54,000 (£420,000 - £285,000 = £135,000 x 40% = £54,000).

Tip. The good news is that with 100% Business Property Relief (BPR, if you meet qualifying conditions (see The next step) you can pass on the family business free of tax by retaining it until death and passing it by will to the next generation. What this means is that the market value of your shares in your company could be excluded from your estate. In our example, that’s a saving in IHT of £48,000 (£120,000 x 40%).

Warning. It’s not possible to guarantee that the 100% BPR will be available on your death. That said, most pundits expect unquoted trading company shares to remain exempt from IHT for the foreseeable future. However, if you want to play it 100% safe there is something you can do.

Proactive solution

It might not be practicable to retain ownership of the company until death and even if it is, it may not be desirable for business reasons. So what’s the alternative?

Lifetime transfer. You can give your property away before you die. In the majority of cases, there will be no tax payable at the time of the transfer, and, so long as you survive for seven years after the gift, no tax is payable on your death. Obviously, this is a difficult decision to make. Pass the assets on too early, and you may still need them to provide you with an income.

Tip. Over time the value of your business is likely to increase meaning a bigger tax bill should the relief be abolished before action can be taken. The rule of thumb is to pass on the business as rapidly as possible and obtain the 100% relief whilst it’s available - if you wait, it may be abolished or you may no longer meet the qualifying conditions.

Other taxes

75% discount. So far, we haven’t mentioned Capital Gains Tax (CGT). Although it can’t be ignored, CGT is far less of a problem here. The business asset taper relief rules encourage passing on the family business as the full 75% taper relief - giving an effective 10% tax for higher rate taxpayers and 5% for basic rate taxpayers - now applies once the asset has been a “business asset” for two years. Paying a small amount of CGT now can be better than a large amount of IHT later.

The next step

For further information on BPR visit http://companydirector.indicator.co.uk (CD 08.08.03).