Partner Article

Businesses need to take notice of inheritance tax

Inheritance tax is one of the highest taxes in the UK and, with a top rate of 40%, it can severely reduce the deceased’s estate. The surviving family not only have to cope with the loss of a loved one, but it often feels like years of hard work accumulating wealth are wiped out in an instant. Many people ignore inheritance tax until later in life. However, new legislation which will take effect later this year means that all business owners and investors should sit up and take note, writes Iain Donaldson, head of the Wealth Management team in Matthew Arnold & Baldwin.

Inheritance tax is charged on a person’s net estate. Therefore (broadly) on death one takes the assets, deducts the liabilities, and tax is charged on the balance. Another key feature of inheritance tax is the relief for assets benefiting from business property reliefs. Crucially, shares in AIM listed companies and private trading companies usually benefit from this relief.

Depending where in its lifecycle a company is, it is quite normal that finance raised for the business is secured against the personal assets of key shareholders, typically, their family home. This used to be effective for inheritance tax, since on death the shares in the company would benefit from business property relief and the debt would be set off against the value of the home.

The new legislation changes the landscape. The rules are complex but the key point is that debt incurred to finance the acquisition of or enhancement of assets which qualify for business property or agricultural property relief will not be deductible from the deceased’s estate (unless the debt exceeds those assets).

Therefore if the main shareholder of a company borrows £1m, invests it in his company and secures it on his £1.5m home, previously only £500,000 of the value of the home would be subject to inheritance tax. Now, unless the company is worth less than £1m, the full £1.5m will be subject to tax.

Other changes could impact on directors loans from the company if they are left outstanding at death, unless there are funds in the estate to repay them on death, they will no longer be deductible when calculating the estate for inheritance tax (unless there are “real” commercial reasons for leaving the debt in place).

This legislation is retrospective, apply to any deaths after this becomes law – which will probably be in July 2013, therefore current arrangements need to be carefully examined as soon as possible.

This was posted in Bdaily's Members' News section by Matthew Arnold & Baldwin .