IHT “Business Property Relief” is a whole subject in itself, but for the purposes of this case study, bear in mind that “business property” such as shares in a family trading company enjoys 100% relief from IHT.
Andrew owns all the shares in a trading company, worth £325,000. His other assets are worth £675,000 – to make this simple, assume they are all cash.
He wants to leave the company to his wife, together with £350,000 cash, and the remaining £325,000 cash to his children. How much IHT will be due when he dies?
Well, we know that the legacy to his wife will be exempt from IHT, and the nil rate band of £325,000 can be used against the legacy to the children, so no IHT will be payable, but his wife will not be able to use his nil rate band on her death.
But we can do better than that!
Suppose Andrew leaves his wife £675,000 cash, and leaves the shares in the company to the children, and then the wife uses £325,000 of her legacy to buy the company from the children?
The legacy to the wife is exempt as before, the company shares get 100% business property relief in the children’s hands, so there is no IHT to pay. There is also no capital gains tax for the children to pay on the sale of the company to mother, because the tax legislation means it has been revalued to its market value at the date of Andrew’s death.
With a little planning, we have still eliminated the IHT payable on Andrew’s death, but also preserved his nil rate band for his wife to use on her death, whilst getting his assets to the people he wanted to have them.
You might also be interested in