Safeguarding Your Family-Owned Business
With the cost of living crisis impacting families and businesses alike, it’s more important than ever to ensure your family inherits your wealth without inheriting a substantial tax liability. Below is an example of how our Taxperts helped a family business navigate their Inheritance Tax (IHT) liability.
Our client is a third generation family-owned company, which has carried on a specialist trade for over 60 years and employs more than 40 people.
Due to low interest rates since 2008/09, the family shareholder/director invested company profits in purchasing commercial properties, creating a rental return of 8 – 10% for the company.
What was the problem?
As a trading company, our client believed that the shares would be eligible for 100% Business Property Relief (BPR) from IHT. However, the problem was that the investment properties had increased in value, so they now represented more than half of the company’s assets, and rental income was now accounting for more than half of the company’s profits.
The shares in the company were no longer eligible for any BPR since the company had evolved into, primarily, an investment company that also operated a trading business.
Due to the company’s worth, the family would be liable for £5m in IHT on inheriting the shares, payable within 12 months of the date of death. This came as a huge shock to the family.
How did we help the client?
We advised the client to separate the two businesses, so that the property investment activities were carried on by a new company, owned separately from the trading company.
The shares in the trading business were immediately eligible for 100% BPR, allowing the shares to be inherited by the fourth generation without any IHT, representing a tax saving of £2.4m for the family.
Under the special rules applying to company reorganisations, the ‘tax cost’ of the investment properties was uplifted to their current market value, tax free. On a future sale of the properties, this could save £600K of corporation tax.
The client can either build up enough cash so that the company can fund the IHT of £2.6m on behalf of the family or the property investment company could sell the investment properties and buy ‘trading’ assets, such as agricultural or woodland assets so that the shares may qualify for 100% BPR in the future.
Overall, the planning reduced the family’s potential tax exposure by £3m and our client has the reassurance that the specialist business can pass to the fourth generation without the risk of the family inheriting a significant IHT liability along with the shares.