With all the recent changes to inheritance tax relief (certain loans not being deductible against the estate etc) it is important to maximise inheritance tax relief where it is available.
Ordinary shares in unquoted trading companies can attract 100% relief from inheritance tax at death, by virtue of Business Property Relief (‘BPR’). However, there is uncertainty about how far this relief extends to monies lent to the company by the directors or family members, in the form of redeemable preference shares and loan notes. By taking care how the company borrowing is structured it may be possible for the lender’s estate to enjoy 100% IHT relief, compared to a 40% IHT liability if care is not taken.
The company directors are often required to inject funds into family companies and the monies lent will be recorded either as a simple loan, loan notes or redeemable preference shares.
A simple loan account is the easiest way to lend funds to the company and clearly this can be repaid tax free. As this is a simple debt it will never qualify for BPR. In order to remove the value from the estate, this asset must be assigned to someone else more than seven years before death.
Issuing loan notes formalises the position further and the loan notes can attract BPR; but only where the aggregation of the loan notes and the ordinary shares held gives the director control of the company. Control is defined as having 51% or more of the voting rights. This may be sufficient in a husband and wife company as 100% of the ordinary shares will be held by the couple, facilitating BPR on the loan notes. Where the shares are more widely spread within the family, the relief will often not be available.
If the monies were instead used to subscribe for redeemable preference shares they can be redeemed in a tax efficient manner similar to a simple loan or a loan note but once the shares have been held for the required two year period they will qualify for 100% relief from inheritance tax.
A review of the current lending structure to private companies is useful to see whether a restructuring could lead to significant IHT savings for the family.
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