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Business Succession and Inheritance Tax…

Clients regularly talk to us about their key points of concern when considering what the future will hold for their valuable assets once they have passed away – squandered inheritance or claims on the estate, and Inheritance Tax.  

Following death, legacies can be carved up by squabbling families, spent or claimed against as part of divorce proceedings, turning valuable, profitable and income producing businesses in to no more than a headache for the recipients of a will.  

Inheritance Tax (“IHT”) can worsen that headache significantly; often publicised as the UK’s most hated tax, it broadly operates by taxing the value of a person’s estate which is over and above the nil rate band (currently £325,000). 

While the nil rate band has been frozen since 2009, property (perhaps the most often inherited asset class except from cash) prices have risen significantly, which has resulted in more and more estates and households becoming liable to the tax.  

IHT can be complex and where due consideration and foresight has not been given, dismay and confusion can ensue at what is generally one of the most emotional periods of our lifetimes. 

Proper planning and forethought can moderate the complexities involved with succession and IHT and can help to provide clarity and control to the taxpayer and their loved ones. With proper planning and support It is possible to protect and retain assets intended to be bequeathed for future generations. We have set out an example below of the planning process a family might go through and the benefits that they and their family could enjoy as a result: 

Case Study 

We were introduced to a husband and wife, who had been operating a property development and investment business from a limited company for 10 years and had assembled a portfolio of residential rental properties during that period with a combined value of £3m, and considerable capital gains. 

Along with the properties they also had cash savings of £500,000, and a valuable main residence which gave them a total projected IHT liability of around £2m.  

With the value of the business increasing over time, due to continued development and reinvestment activity, the couple decided that it would be prudent to take steps to ensure that the benefit of their hard work was protected to the greatest extent possible for their children and other key staff members, and thinking further ahead, that the property business provided a valuable career path for the family creating a long-lasting legacy and benefit for the generations to come. 

A secondary consideration of theirs was the potential IHT implications of passing on such significant value, and the affects that this could have on the net value of their estate at that point. 

Solution 

Having undertaken a thorough review and assessment of the couple’s personal circumstances and their intentions for the continuity of the business and protection of their estate, we considered a number of options which appeared to meet their objectives. 

The main value of the estate is held in the shares in the limited company which the husband and wife own personally, and as such this value would be reflected in their personal chargeable estates.  The cash savings that the couple held had been earmarked to fund their retirement, so we did not consider this as part of our advice as it was expected to be utilised in full by the couple during their lifetime. 

We considered maximising allowances, the use of gifts and charitable donations, which can of course be useful options, but none of these exercises would really help to achieve the couple’s main aims of protecting their business. 

One practicable option was for them to establish a succession trust structure and make a contribution of their shareholding in the limited company. Providing that the trust and the contribution met certain conditions, the transfer would not give rise to an immediate IHT charge and the gains on the company shares should not be crystallised. The succession trust structure would place the shares in the business outside the immediate reach of the clients and their children, protecting the business from squander and claims. Of course, the clients, their children and other staff members would continue to work within the business, operating it in the same manner as they were before. The valuable shares would however now be held in a secure environment to provide the best chance of the business continuing for the long-term future.  

What’s more is that the bulk of the value of the business would be transferred to the trust, creating an immediate reduction to their personal chargeable estates for IHT purposes. The projected IHT liability should be reduced considerably as a result. 

It was determined that this approach would satisfactorily achieve the couple’s aim of ensuring the continuity of the family business, for this and future generations. 

Succession planning can be complex, and so if you or your client would like to consult with a specialist to assess your business succession plans then please contact us.

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