Inheritance Tax
Property Investment Companies
A bit of background...
If you own investment properties within a limited company, typically referred to as a Property Investment or Family Investment Company, then the value of your shares are in your estate for Inheritance Tax purposes and potentially liable to 40% Inheritance Tax.
Unlike shares you might own in a Trading Company, a shareholding in an Investment Company does not normally qualify for any form of relief from Inheritance Tax.
As such the value of these shares will be subject to 40% Inheritance Tax on your death and you should consider how your heirs will raise the funds required to settle the liability with HMRC on your death.
Your heirs may need to raise finance personally, or by leveraging the company’s assets or in many cases by selling assets in the company which could effectively bring the company to an end.
You may have considered gifting shares to your children during your lifetime, but consideration should be given to your Capital Gains Tax position and whether you are comfortable giving up the control, dividend income and capital value of these shares.
Crofton Bradfield can help you to protect your legacy and offers two advice solutions:
Solution 1 – Freezer & Growth Shares
One option is to consider capping the current level of exposure to Inheritance Tax and this can be achieved by a reorganisation of the current shares and the creation of two new classes of share.
A class of share to retain the entitlement to the company’s current value (Freezer) and a second one that is entitled to all future growth in the company’s value (Growth).
The Freezer shares are retained by the original shareholders to ensure they retain control and the right to dividend income, but the Growth shares can be gifted to a trust or family members without any exposure to Capital Gains Tax or Inheritance Tax (dependent on the rights attached to the Growth Shares).
Clearly this approach does not reduce the current level of Inheritance Tax, but it does ensure that all future growth accumulates outside the of your estate, which in turn reduces the overall burden of Inheritance Tax on your death.
Solution 2 – Business Succession Trust (BST)
In the right circumstances and where the objective is to establish a structure that enables the company to be preserved in the event of a shareholder’s death, then it is possible to establish a BST and transfer your shares into trust, without triggering a Capital Gains Tax or Inheritance Tax liability.
The BST is also exempt from the 10 yearly Inheritance Tax charges that normally apply to Discretionary Trusts.
Typical Client Profile
The Company will typically be owned by the parents, who are both Directors.
The Directors will be keen to make provision that enables them to preserve the business in the event of a shareholder’s death.
The Directors will recognise that without any provision, their heirs will need to raise 40% of the value of the Company to pay an IHT bill and that would probably bring the Company to an end.
The company is likely to hold various properties, whether freehold or leasehold, such as commercial, residential Buy to Let, HMOs, Land, etc.
The company will be actively managed.
The Company will have employees who are required to actively manage it.
As part of the overall succession planning there will be an intention to employ further staff in the future, who will assist with the running of the business and its continued expansion.
At Crofton Bradfield we will help you structure the right solution to protect your property investment company in the event of a shareholder’s death and to ensure your successors are limiting their exposure to inheritance tax.
To find out more about how our Freezer/Growth Shares or Business Succession Trust can help you, then please click to contact us, or book an appointment and we will take you through the advice in more detail.
