James and Wendy are comfortably off with a large house in a nice area and a cash rich engineering business...
James ran the business but was beginning to take a back seat as he was entering his late sixties and had employed a good manager in the shape of their son, William. They were concerned about Inheritance Tax (IHT). James had started the business forty years ago and built it up from nothing. They were not keen that HMRC would take 40% in tax on their deaths, so they decided to take advice.
The chap from Rutherford Hughes Limited (RHL) sat down with them and asked them about what their fears and concerns were and what they wanted to achieve. The RHL adviser explained more about IHT, the thresholds, reliefs and potential solutions.
James stated, “We would be keen for William to take over the business when I die as he has worked in it with me for some time. Should I give it to him now and hope to last seven years?” Our man from RHL came back with more questions. “The first question, do you need the income from the business? If ‘yes’, then you have just cut yourself off from it.” He continued, “Do you realise that gifting the business creates a disposal for CGT purposes and therefore a potential tax liability?”
“Further, your business may qualify for Business Relief for IHT.”
James replied, “We could draw on our pensions to replace the salary and dividends we receive but I don’t like the idea of paying tax at all when William gets the business. You better tell us more about Business Relief.” Our man explained that the business had to be “qualifying” and had to be owned for a period of two years. Under the current rules it would then be 100% exempt from IHT. Wendy became excited. “So, we can just leave the shares in the business to William and that’s it; he gets it IHT free? What about Capital Gains Tax?” “Let’s deal with the easy one first,” said our man. “Capital Gains are wiped out on death so there is no tax to worry about there. However, IHT is still an issue as your company is cash rich. In fact, it is carrying too much cash and therefore, as we speak, has potentially lost its qualifying status for Business Relief.”
James and Wendy looked at each other.
Wendy asked, “How can we sort this out?” “Well, you could pay yourselves a dividend which would suffer income tax and would have the money in your estate for IHT purposes. What might be better is to top up your pensions via a company contribution as this would be immediately outside your estate but that would not reduce the cash sufficiently.”
“As a business, it can invest in its own qualifying Business Relief scheme and the money is immediately outside your estates and brings the engineering business back into qualifying status itself.”
“Brilliant!” shouts James. “But what if I need the money back in the business?”
“No problem. We can surrender all or part of the investment as needed. It would take a few weeks to get the money back into the business account.”
Our chap continued, “Whilst Business Relief investments do try and reduce risks, they are still investments and as such their values can go up or down and you might not get all your money back. That said, it will save you a lot of IHT.”