Inheritance tax is paid on net taxable assets at the rate of 40%. Individuals have a standard nil rate band of £325,000 (for 2019/20), which can rise by another £150,000 if leaving the main residence to lineal descendants such as the children. Assets left to a spouse or civil partner are normally exempt from inheritance tax.
Certain types of shares are sheltered from inheritance tax by business property relief (BPR) at up to 100%, as well as other defined business assets. Farming business owners could have up to 100% agricultural property relief.
Private company unquoted shares
Shares in non–investment unquoted companies can generally pass to heirs 100% IHT-free if held for at least two years. Shares in an investment company do not qualify for BPR relief. Shares listed on the alternative investment market and shares that qualify under the enterprise investment scheme rules and are held for at least two years can also be free of IHT.
Public companies
Shares held in public companies (such as quoted on the FTSE) will normally be subject to IHT.
Shares left to charity
Legacies of shares to charities will generally be exempt from IHT.
Leaving private limited company shares in your will
As long as they are held for at least two years, unquoted shares may be bequeathed to family members and third parties free of IHT where BPR applies in full. The recipient of the shares potentially continue to benefit from IHT reliefs, as well as their successors on their deaths.
Selling private limited company shares on death
This is usually accomplished through either a ‘buy and sell’ agreement or a ‘double option’ agreement. Often shareholders insure themselves or each other to provide cash for the purchase of the shares on the death of a shareholder. A buy and sell agreement is a pre-sale contract that completes after the death and is not normally IHT-efficient, whereas the double option agreement is post-death and is generally considered to be IHT-efficient.
Consider the most efficient way to leave your shares to heirs or other shareholders or third parties – either by will or a double option agreement. Life assurance premiums paid personally could reduce an estate’s IHT liability – each premium payer can claim £3,000 worth of annual exemptions, in addition to possibly paying premiums out of normal income excess to living requirements.
Directors’ loan accounts
If a director funds the business with cash (i.e. loans money to the business) or introduces assets to the business such as a motor vehicle, or does not withdraw dividends voted to him, the value is added to his or her loan account. This value falls into his estate for IHT purposes and is not sheltered by BPR.
Therefore, consider replacing loan account cash with bank finance or moving funds to an IHT-exempt ‘wrapper’ to protect funds against IHT. Loan accounts can also be capitalised into shares, thus potentially achieving BPR relief. Otherwise, a director’s loan account of (say) £250,000 could draw £100,000 worth of IHT.
Buying back shares
A company can buy back shares and cancel them if certain conditions are satisfied. This should only happen after death and after probate, so that the estate potentially qualifies for BPR on the shares.
Transferring shares to a trust
Shares transferred to most types of trust during lifetime are immediately chargeable lifetime transfers (i.e. they are not normally potentially exempt transfers). However, where BPR applies, the shares should be sheltered from the lifetime IHT charge of 20%. Shares not exempt will be subject to an inheritance tax charge, subject to the nil rate band and other allowances (if available).
Unincorporated business owners
An individual partner’s share in a partnership may qualify for 100% BPR and be sheltered from IHT. This includes the value of a capital account in the business (unlike a director’s loan account), as it is seen as a business asset. However, large cash deposits at the bank may not qualify for BPR, as well as non-business investments. Business assets used by a sole trader should normally qualify for BPR at 100% if the two-year rule is satisfied.
