Is your company a family IHT shelter?

If your elderly relations have cash or investments to spare and are worried about inheritance tax, how can your company help them avoid it and, at the same time, do you a favour?

Human nature

IHT is usually low on people’s agenda when it comes to tax planning, but leaving it to the eleventh hour is the worst possible way to approach it. Yet that’s exactly what the majority of folk do. So, if you’ve got elderly relations that find themselves in this position, what advice can you offer?

Seven-year problem

You’ve probably heard that if you give an asset away within seven years of death, HMRC will treat it as part of your estate for IHT purposes. So, what, for example, should you do if Mum’s health takes a turn for the worse? IHT may not be a subject you want to discuss but the alternative could mean handing over a big chunk of her estate (and your inheritance). So it’s far better to bite the bullet. If you suspect she doesn’t have seven years left what can you say?

Take AIM

If your mum has substantial free assets, by that we mean that the money is held in bank deposits or stocks and shares etc., there’s a neat re-investment strategy.

Tip. Most of the companies quoted on the alternative investment market (AIM) carry on a trading business that qualifies their shareholders for IHT business property relief (BPR). If you buy shares in one or more of these, the value of your investment will get 100% relief from IHT provided you own them for at least two years. Unless you’re familiar with the AIM market, you’ll probably want to ask a broker to give you advice on the type of company to invest in.

Timing

There could be a capital gains tax (CGT) problem if your relation needs to sell existing shares to fund the AIM purchases. But now might be a good time to think of switching investments from traditional stocks to those quoted on AIM. Values of many shares are still down and so any gains will be low. However, if a gain can’t be avoided, there’s a tailor-made solution.

Tip. A CGT holdover election can be made to defer tax on any capital gain where the funds are re-invested into an unquoted trading company. This includes AIM companies. The gains are deferred until the AIM shares are sold or the owner dies, in which case the gain is wiped out and escapes completely tax free! And of course BPR means there’s no IHT either.

Your own AIM

Tip. Before you race off to the AIM try looking closer to home first. Do you or other members of the family own an unquoted trading company? There’s no reason why your relation can’t invest by buying shares in your company. You could create a different class of ordinary share just for them so that you can pay dividends selectively if they need the income.

Trap. You can’t keep the money invested sitting around in the bank. If there’s too much cash doing nothing in the company, the Taxman can argue a proportionate reduction of BPR.

For more information on Inheritance Tax, please don't hesitate to contact us.

Is your company a family IHT shelter?

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