Pre-sale Inheritance Tax planning

The issue

Despite previous consultations on the possible changes or ‘simplification’ of Inheritance Tax (‘IHT’), no changes were made during this week’s Budget.  This means we still have an extremely favourable regime, whereby gifts of unlimited value can be made without IHT, simply by surviving seven years.

In addition, the very valuable shelter provided by Business Property Relief (‘BPR’) continues to exempt interests in trading businesses and unlisted trading company shares from IHT.

As this relief applies at death (as well as on gifts) the general consensus is to retain such assets until death and attract the capital gains tax (‘CGT’) uplift to market value at death.  That way, the beneficiaries of the estate receive the assets with no IHT and with no inherent gain. However, what if the company is likely to be sold before death?  This would lead to otherwise exempt assets being turned into cash, which attracts no relief from IHT.  What then?

Pre-sale planning

As the benefit of the CGT uplift has disappeared (as the gain will have been crystallised in lifetime) and the cash will attract IHT on death, a gift of these shares should be considered prior to sale.  Often, however, the shares will be worth significant amounts and the shareholder will want to retain some control over gifts of such a large value.  This is where trusts come in.

Usually, it is impossible to get any value in excess of £325k into trusts without an immediate 20% IHT charge.  However, with 100% BPR this problem disappears.  By using a trust, the shareholder has removed value from their estate, is able to control what happens to that value and the gift has not increased anyone else’s IHT estate.  Of course, the trust is subject to a separate IHT regime which imposes a charge of up to 6% IHT every 10 years on chargeable value over the nil rate band (currently £325k).


Mr Jolly owns 100% of a trading company worth £10m.  If he sells the company, the potential IHT exposure to his estate will increase by up to £4m (£10m x 40%).  If, instead, he transfers 50% of these shares into trust, say for his children, grandchildren etc. then provided he is excluded from benefitting and survives seven years, he will have saved up to £2m of IHT on his death.

The trust will have a charge to tax in 10 years’ time of £280,500 ((£5m – £325k x 6%) assuming no growth on the value) – unless it has reinvested in BPR assets, when it would suffer no tax. This offers a saving of over £1.7m. There is some further planning that could be undertaken to even reduce the trustees’ tax too!

As with any tax planning that involves many different taxes, there are intricacies to be aware of and professional advice should always be taken.  One such complication is that the donor may wish to retain sufficient shares in their own name to realise at least £1m of capital gain on sale.  This allows them to fully utilise the 10% CGT rate applying to Business Asset Disposal Relief (‘BADR’).  Without further planning, shares held by trustees would not benefit from this relief.  However, the reduction in the lifetime allowance for BADR from £10m to £1m has made the decision to use a trust much easier.

Forbes Dawson view

Too many clients are missing the opportunity to undertake this relatively simple tool of IHT planning, as they fail to take advice before the sale. With the threat of substantial changes to the IHT system still on the horizon, it is important to make use of these valuable reliefs where available. Although Rishi Sunak says he is uncomfortable with the current high tax burden, there is still pressure to ‘level up’.  As regards future IHT changes, nothing is off the table.




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