Most people will be aware that shares in an unquoted trading company (including AIM shares) are exempt from IHT after a two year holding period. This has led to investors being attracted to AIM portfolios and various ‘product funds’ which will provide IHT protection after a two year holding period. There are however times when taxpayers should be looking closer to home.
It is surprising how often normally sophisticated clients fail to appreciate the IHT opportunities associated with investing in the company of one of their children.
Client: I am thinking of gifting some cash to my son because this will ultimately save IHT.
Forbes Dawson: It will save you IHT if you survive seven years from the date of the gift and it will save IHT at a tapered rate if you survive over 7 years.
Client: The trouble is that I then won’t have the cash and my son will probably just waste the money on a Zonda.
Forbes Dawson: Why not invest the cash in shares in your son’s trading company. You could invest in preference shares which you may then be able to redeem if you have second thoughts about your generosity.
Client: But this will not save any IHT.
Forbes Dawson: If you survive two years from the date of subscription then if your son (or anybody else) ends up inheriting the shares then they will not be subject to IHT. If you redeem the shares before death then you are correct that no SDLT will be saved (but you will have the cash!)
Client: What if the company goes under?
Forbes Dawson: Clearly that is a commercial risk that you take but you said your son would only waste the money anyway!
In the right family circumstances investment in children’s companies can be a win-win proposition. Survival only has to be two years rather than seven to achieve IHT savings and there can be scope to recoup the investment. Care needs to be taken in structuring appropriate shares.
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