Renewing your IHT relief

Selling your business can lead to you losing out on IHT business property relief. What can you do to ensure this doesn't happen?

BPR lost

General rule. BPR is available on shares in unquoted companies if certain conditions are met. The net result is that 100% of the market value of those shares escapes Inheritance Tax (IHT).

Problem. Any business must be owned for two years before the BPR exemption applies. Therefore, if you swap your shares for others in a takeover deal, the BPR clock gets reset to zero. This means a potential IHT bill at 40% on the value of the sale.

For example, Harry has just sold his company, H Ltd, to Takeover Ltd for £2m. He received £1m in cash and the balance as a stake in Takeover Ltd. As soon as Harry received cash for his shares, the BPR ceased to apply. The sale of Harry's company has increased the IHT bill on his estate by £800,000 (£2m x 40%) if he dies within two years of the sale. Tip. Take out life assurance cover for the first two years to provide the funds to pay the IHT bill. However, there are other things you can do to mitigate this.

It's a replacement

Clock doesn't stop. If the new shares can be treated as replacements for the old shares, then the BPR ownership clock does not stop. Meaning you get 100% relief on the new shares. We recommend taking specialist advice to check if these are replacement shares, since this is a complex area where both shares (old and new) have a number of conditions to be met. These include:

1. Not securities. Make sure your stake in the new company is in the form of shares and not what the Taxman calls "securities". These include debentures and loan notes, which pay the holder a rate of interest rather than a dividend based on the company's profits. Securities will not qualify for BPR unless you control the company.

2. Not a plc. The business must be a trading company and not listed on a recognised stock exchange. The Alternative Investment Market (AIM) does not count as a recognised stock exchange, so these shares qualify for BPR. However, if they progress to the main market the BPR disappears.

Or simple spouse exemption

Spouses only. If the replacement shares route is not available, consider leaving the new shares in your will to your spouse. No IHT is payable on this transfer between spouses and the surviving spouse is treated as if they had owned the shares for the whole period.

Be careful. If you transfer the shares to your spouse before death, the ownership clock gets restarted and so the spouse must wait two years before the shares qualify for BPR.

Or reinvested in unquoted shares

Unquoted and trading. If, for some reason, the spouse exemption is not available, you could reinvest the proceeds from the sale into shares of unquoted trading companies. You are then putting your money back into an IHT-exempt asset. Shares issued under the Enterprise Investment Scheme (EIS) qualify, as will any trading and unquoted company. If a share is listed on AIM it is unquoted.

Two-year wait. However, remember the two-year qualifying period and take out life assurance to cover the risk of having to pay the IHT in the intervening period.

Check to see if the shares qualify as a replacement. This way the BPR period is continuous. If not, and you have to wait two years to regain BPR, take out life assurance to cover yourself in the meantime.

If you need any more information on inheritance tax or on any other tax issues, please get in touch with us on 0191 386 4786 or by emailing information@westwaters.com

Renewing your IHT relief

Categories