Malcolm ZoppiMon Oct 09 2023
Understanding Inheritance Tax on Company Shares – A Guide
Explore how inheritance tax applies to company shares, the benefits of business property relief (BPR), and other inheritance tax planning considerations.
In the United Kingdom, inheritance tax can have a significant impact on the distribution of assets. When it comes to company shares, the tax implications can be especially complex. It’s essential to have a firm understanding of the relevant regulations to ensure that your estate planning is effective and efficient.
In this comprehensive guide, we’ll explore how inheritance tax applies to company shares, the benefits of business property relief (BPR), and other inheritance tax planning considerations. By delving into the intricacies of these topics, you’ll be empowered to make informed decisions about your business assets.
- Inheritance tax can have a significant impact on the distribution of assets in the UK.
- Company shares are subject to specific tax liabilities that must be considered in estate planning.
- Business property relief (BPR) offers a potential means of mitigating inheritance tax liability.
- Transferring shares to a spouse can have associated tax advantages.
- Inheritance tax planning requires consideration of a range of factors beyond BPR, including agricultural property relief, transfers of value, and the role of administrators.
How Inheritance Tax Applies to Company Shares
When it comes to inheritance tax, the treatment of company shares can be complex and confusing. As a shareholder, you are considered to own a part of the company, which means that the shares form part of your estate for IHT purposes.
If the shares are publicly traded, the executor of the estate will value them based on their market value on the date of death. If they are unquoted, however, their valuation may require specialist knowledge and expertise.
The role of the beneficiary is also crucial. If the shares are passed on to a spouse, there is usually no IHT charge. But if they are passed on to anyone else, they will be subject to IHT.
Fortunately, business property relief (BPR) is available to qualifying assets, which includes shares in certain types of businesses. If the business is a trading limited company, the shares may qualify for BPR, which allows for a 100% reduction in IHT liability. However, if the company is an investment company, this relief may not apply.
|Shares to your spouse
|If shares are passed on to a spouse, there is usually no IHT charge.
|If shares are passed on to anyone else, they will be subject to IHT.
The potential impact of capital gains tax is also an important consideration. If the shares have increased in value since they were acquired, the executor may face a tax charge on the gain.
One strategy to consider is transferring shares to a spouse before death. This can be advantageous as any IHT liability is deferred until the spouse’s death. Furthermore, the spouse’s estate will inherit the shares at their market value on the date of their death, which means any increase in value will be free of IHT.
It’s worth noting that BPR has certain conditions that must be satisfied. For example, the business must be a qualifying business, and the shares must have been owned for at least two years. Limited companies may also need to meet certain criteria to qualify for business property relief.
Overall, the application of inheritance tax to company shares can be complex, but understanding the available reliefs and planning accordingly can help mitigate any potential liabilities.
Business Property Relief and its Benefits
Business property relief (BPR) is a valuable tool for mitigating inheritance tax (IHT) liability, and it may apply to shares in a private company. HM Revenue & Customs (HMRC) considers certain types of shares to be business assets, and as such, they are eligible for BPR. This means that if you own shares in a trading limited company, they may fall outside your estate for IHT purposes, subject to certain conditions.
In order for BPR to apply, the shares must have been held for at least two years, and the company must be a trading business rather than an investment company. This is because BPR is designed to support family businesses and other trading entities. Additionally, BPR may also be available for shares listed on the Alternative Investment Market (AIM), provided that the company meets the qualifying criteria.
The main benefit of BPR is that it can help to reduce the IHT liability on your estate. If you die, the value of your shares will be included in your estate for IHT purposes, and this can result in a significant tax charge. However, if the shares qualify for BPR, they may be free of IHT altogether. For example, if you own £500,000 worth of shares in a private trading company and they qualify for BPR, your estate will not be subject to IHT on those shares.
BPR may also be relevant if you are selling your business or passing it on to your heirs. In either case, BPR can help to reduce the IHT liability on the proceeds of the sale or the value of the business. It’s important to note, however, that the company must continue to qualify for BPR at the time of sale or transfer. If the company stops trading, for example, BPR may not apply.
If you are considering using BPR, it’s important to understand the conditions under which it applies. The company must be a trading business rather than an investment company, and it must have been trading for at least two years. Additionally, if you want to claim BPR for shares held in a discretionary trust, there are specific rules that apply. You should consult with a professional advisor to determine whether BPR applies in your situation.
|BPR may apply to shares in a private trading company, subject to certain conditions.
|Shares must be held for at least two years, and the company must be a trading business rather than an investment company.
|BPR can help to mitigate IHT liability on your estate, particularly if you own a family business or trading limited company.
|If you are planning to sell your business or pass it on to your heirs, BPR can help to reduce the IHT liability on the proceeds or the value of the business.
|It’s important to consult with a professional advisor to determine whether BPR applies in your situation.
Inheritance Tax Planning and Other Considerations
While business property relief (BPR) can be a valuable tool in mitigating inheritance tax (IHT) liability, there are other strategies worth considering. One such option is agricultural property relief, which can help reduce the value of certain assets for IHT purposes. To claim business property relief, it is important to ensure that the shares are in a private trading limited company, subject to IHT, and that the business has been operating for at least two years.
Sole traders may also wish to consider their options carefully, as they are effectively their business as a whole. To ensure that your hard-earned assets fall outside your estate as early as possible, it is worth exploring ways to transfer their ownership. This can help protect them from IHT and potentially leave them free of IHT altogether. However, it is important to be mindful of the transfer of value rules, which could result in an IHT charge.
For those with shares in an unquoted company, there may still be ways to reduce the IHT liability. Limited liability partnerships can sometimes survive 14 years without triggering an IHT charge, and careful consideration needs to be given to the trading activities of the business.
Finally, it is important to consider the role of the estate administrator in relation to IHT planning. They may need to take care of trading activities and assets that fall outside your estate, and it is wise to ensure that they are aware of your wishes in this regard. By acting early and taking care to consider all options, it is possible to mitigate IHT liability and protect the assets that you have worked so incredibly hard to build.
How does inheritance tax apply to company shares?
Inheritance tax applies to company shares based on the value of the shares at the time of the owner’s death. The tax liability is determined by factors such as the type of shares, whether they are quoted or unquoted, and the availability of reliefs such as business property relief (BPR).
What is business property relief and how does it benefit inheritance tax planning?
Business property relief (BPR) is a tax relief that can significantly reduce the inheritance tax liability on shares in a private trading limited company. To qualify for BPR, the company must be operational for at least two years, and the shares must meet certain criteria. By claiming BPR, individuals can effectively mitigate their inheritance tax liability.
Are there any other considerations for inheritance tax planning?
Apart from business property relief, individuals can explore other strategies to minimise their inheritance tax liability. This includes exploring agricultural property relief for certain assets, transferring assets outside of the estate, and taking advantage of time-sensitive options such as transfers of value. It is advisable to seek professional advice and plan early to ensure your assets are protected from excessive taxation.
Find out more!
If you want to read more in this subject area, you might find some of our other blogs interesting:
- Can you pay different dividends to shareholders?
- Do dividends count as income for pension contributions?
- How often can I take dividends from my limited company?
- Can I gift shares?
- Transfer shares to a spouse
- Can a director be held personally liable for company debt?
- Cost to remove a director from a company?
- How to change a company name in the UK?
- When a company director resigns how long is a director liable
Disclaimer: This document has been prepared for informational purposes only and should not be construed as legal or financial advice. You should always seek independent professional advice and not rely on the content of this document as every individual circumstance is unique. Additionally, this document is not intended to prejudge the legal, financial or tax position of any person.
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