24th January 2025
Posted in Articles, Business Property Relief, IHT by Andrew Marr
In previous Tax Bites we have discussed the benefits of inter-spouse transfers before the death of one of the spouses.
Example 1
Jack and Vera have a joint estate worth £4m. Sadly Vera is terminally ill and with this in mind Jack transfers all his assets to Vera with a view to inheriting them. Here, any transfers would take place at no gain no loss for capital gains tax purposes but then Vera’s assets will be rebased to market value in Jack’s hands at the date of Vera’s death (there would be no inheritance tax (IHT) in relation to an inheritance from a spouse). Such planning therefore achieves a tax-free uplift in base cost of any capital assets on Vera’s death.
New Business Relief rules
In the 30 October 2024 Budget, it was announced that Business Relief (BR) (formerly Business Property Relief) would be limited from 6 April 2026. Currently there is unlimited relief for trading assets, trading company shares and agricultural property, but after 6 April 2026 there will be full relief for the first £1m of value but only 50% thereafter. These rules will apply on a person-by-person basis.
This tweak to the rules means that the planning above will be more relevant than ever for business owners. However, the slight difference will be that business assets should generally be inherited by the kids (or in some cases, a trust for the kids).
Example 2
Gail and Brian own 50% each of Newton and Ridley, a highly respected brewery worth approximately £50m. Unfortunately (you’ve guessed it!) Brian only has days to live after having sustained a gut wound in a nightclub brawl. In some hasty tax-planning at Brian’s bedside Gail gifts all her shares to Brian. Brian also then leaves all his shares to his kids before gasping his last breath. Because Brian dies before 6 April 2026 full BR is available on his shares and the kids inherit them with a base cost of £50m. Assuming Gail lives beyond 5 April 2026, this planning will save a lot of tax because her shares would otherwise be subject to IHT at 20% for all value over £1m. Although the estate could probably argue that her shares were worth less than £25m (say 75% of the pro-rata value) this would also mean that the kids would have a lower base cost on a future disposal. In the first scenario, the kids can sell the company for £50m with no tax implications. In the second scenario (if we assume the 50% shareholding is worth £18.75m with a 25% discount) IHT of £3.55m would be due and (at 24%) there would also be £1.5m of capital gains tax to pay on a disposal of the whole company for £50m.
Forbes Dawson view
Although nobody likes to think about tax when a loved one is dying, the hard facts mean that business owners should be considering tax planning opportunities when it seems likely that a spouse will die. The stakes are higher for BR assets if such a death is likely to take place before 6 April 2026. Previously, it may have made sense for family businesses to be inherited by the surviving spouse with the hope of no IHT and a high ‘tax-free’ capital gains tax base cost. This convention has been tossed on its head for higher value companies by the radical upheaval of the BR regime. The optimum solution can be established by understanding whether the business is likely to continue after Mum and Dad’s death, or whether it will be quickly converted into cash.
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