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Limited company inherited.

Will IHT, Corporation Tax and Income Tax all be due?

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Hello

A limited company with residential investment properties worth £2m has been left in a will to three members of the family. The easiest way to deal with this is for each person to get a third of the company shares.

However, I assume the company will be valued £2m so 40% inheritance tax on that. If the properties are then sold (which were bought a long time ago) there will be corp tax on the profits but the proceeds will remain in the company. Then for the family to take the money out the company they will pay another 32.5-40% income tax on the dividends/income.

How can this be arranged to avoid some of this?

Many thanks

James    

Replies (23)

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By Paul Crowley
16th Sep 2021 20:25

No
That is why holding residential properties in a company is just so stupid.
Held as a person the CGT disappears on death, and there is no dividend tax.

I have posted that opinion on here just so many times.

Add the taxes up and there is just so little left to the beneficiaries.
They all thought there was a pot of gold
The gold belongs mostly to HMRC

Thanks (3)
paddle steamer
By DJKL
16th Sep 2021 23:12

First, just because the company owns £2m of IP does not mean the shares are worth £2m.

1. If FRS102 applied somewhere within the accounts will be Def Tax.

2. If each owns 33.33% of the shares then there may well be scope to discount the share valuations re issues re control.

3. Have you considered what indexation bites if owned for a number of years?

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Replying to DJKL:
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By Paul Crowley
16th Sep 2021 23:29

Good comments
But IHT is based on the owner, not who gets it
Deferred tax probably not significant and probably micro company rules based on 2 out of three
Employees less than ten and income would probably be OK to qualify
Even then If not micro how much in the way of advanced capital allowances?

I stand by my opinion
Houses in companies is not best unless an exit stategy has been considered, including death of shareholder

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Replying to Paul Crowley:
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By Paul Crowley
17th Sep 2021 10:13

On second thoughts IHT is based on value of the company.
So the potential liabilities to tax will reduce the value of the company as quite clearly no buyer would pay £2 million
Legatees then have a value for CGT so should not face too much of a hit, if any, on the eventual disposal, provided that the company goes through a Members voluntary liquidation

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By paul.benny
17th Sep 2021 07:29

I'd like to extend my house using an inheritance. @OP, will you design it for me at no charge?

Thought not.

So why do you think professional accountants will give you and your co-legatees our advice for free, when, given the sums mentioned there are ample resources to obtain advice?

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Replying to paul.benny:
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By JamesR36
17th Sep 2021 08:39

Maybe Ive misunderstood the scope of this forum but I give out a lot of free advice on similar forums in my field. Please PM me with details of your project and I will see if I can help.
We will of course be getting advice on this but we just wanted to get a basic understanding of the issue before we do this as we have been badly advised in the past.
Many thanks for everyone’s messages.

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Replying to JamesR36:
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By paul.benny
17th Sep 2021 09:47

My construction project was a rhetorical device (although when I did build an extension some years ago, I did use an architect and it was money well spent)

As I'm sure you experience in your own field, "simple" questions rarely have simple answers. Especially questions from people who aren't already working in the same profession.

I'm glad you're going to be seeking proper advice.

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Replying to JamesR36:
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By Leywood
17th Sep 2021 10:02

Im sure you wouldnt be giving away your detailed drawings for free.

A little knowledge is dangerous. In this case, very dangerous.

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By Tax Dragon
17th Sep 2021 07:47

To expand slightly on paul.benny's comment...

The reason there may be multiple taxes is that there are multiple taxpayers.

The deceased pays IHT.
The company pays CT.
The shareholders pay IT and CGT.

Multiple taxpayers means potentially multiple clients. An accountant could not (or at least should not) take, eg, just you on as a client and advise you on all the above issues.

But an a accountant could at least advise you. And could probably take on more than one client here without conflicts of interest, so may thus be able to advise on more than one of the issues.

This forum, honestly, cannot advise you about any of the issues. On tax bills of this size, why not take advice?

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By johngroganjga
17th Sep 2021 08:26

It would be insane for the company to sell its properties and for the shareholders then to take what is left in the company out as dividends. They should wind the company up, and take out the company’s assets as capital distributions subject to CGT - which will probably be £Nil as the base cost of the shares will have been rebased on the death of the testator.

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Replying to johngroganjga:
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By Tax Dragon
17th Sep 2021 09:45

johngroganjga wrote:

It would be insane....

Depends on circs, doesn't it John? Though I would be surprised if the plan set out in the OP was optimal.

johngroganjga wrote:

They should....

Hm, I doubt your plan is optimal either - though again of course it depends. However, I certainly wouldn't be saying they "should" do what you suggest. Not based on the OP, anyway.

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Replying to Tax Dragon:
By johngroganjga
17th Sep 2021 09:56

My response was presupposing that the company was going to sell its properties. If it isn’t then indeed everything becomes simpler. But if it sells its properties, how else would you advise the shareholders to extract the value from the company tax efficiently?

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Replying to johngroganjga:
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By Tax Dragon
17th Sep 2021 10:05

As I said, it depends. If you yourself are in need of advice, PM me - or maybe look for a tax advisor local to you. (I don't think we should - that word again - discuss your personal affairs in the forum.)

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Replying to Tax Dragon:
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By Tax Dragon
17th Sep 2021 10:42

Justin is starting to expand on "it depends".

To put it another way, that hopefully we can all understand: a good advisor is worth the fees; Aweb doesn't charge, but is not a good advisor.

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Replying to johngroganjga:
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By Justin Bryant
17th Sep 2021 10:18

Agreed and that addresses/corrects some of PC's misleading points. [Edit: I note PC's corrected some of that at 17th Sep 2021 10:13.]

Also, why not simply keep the Ltd as an FIC, assuming everything's friendly (maybe a mortgage can pay the IHT bill). Tax efficient salaries can then be paid to family members etc.

There is potential planning to uplift the base cost in the company etc.

Free webinar 23/09/2021 at 14:00 – 15:00 here: https://www.taxinsider.co.uk/tax-webinars

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Replying to Justin Bryant:
paddle steamer
By DJKL
19th Sep 2021 23:36

If company borrows against property to cover IHT how are these funds to be withdrawn?

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Replying to johngroganjga:
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By Paul Crowley
17th Sep 2021 10:15

Appologies
Had not read down this far when adding comment above

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By AndyC555
17th Sep 2021 10:38

Depends on the will I suppose but if the will was written such that assets should be realised and cash distributed to beneficiaries, then if a £2m company is sold by the Trustees to a third party for £2m, IHT would be due and the balance paid to the beneficiaries.

Of course, there might be latent Capital Gains in the company that would reduce its value.

And/or as already mentioned, CGT won't be much of an issue for the beneficiaries as they inherit the company at the probate value for their CGT purposes.

Unless the beneficiaries want a cash shell company, why would they keep it in place rather than liquidate it?

It's certainly not as apocalyptic as imagined.

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By JamesR36
17th Sep 2021 10:58

Thanks for all the advice. I didn’t expect such a big response.

There are no specific requirements in the will. The ideal result would be to keep the properties but to transfer them out of the company and to the beneficiaries. They then might be sold some time in the future.

Maybe a members voluntary liquidation could be the best way but of course we will be getting someone to go through the case in detail.

Many thanks

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Replying to JamesR36:
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By Paul Crowley
17th Sep 2021 11:16

Start point is the company valuation
Which should be a lot less than £2M
That is worth paying the fee for
It will not be a simple calculation

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Replying to JamesR36:
By johngroganjga
17th Sep 2021 11:19

But transferring the properties out to the shareholders triggers the CT liabilities, with no cash to pay them with. Why is that better than leaving the properties in the company until they are sold to third party purchasers for cash?

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Replying to johngroganjga:
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By AndyC555
17th Sep 2021 11:49

I'm not 100% sure but the plan could be to distribute the properties to shareholders as assets in a winding up.

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Replying to AndyC555:
By johngroganjga
17th Sep 2021 13:57

Yes, but, as I said, that triggers CT liabilities without creating any new cash to pay them with. What is the point of that?

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