Inheritance Tax on properties owned by my Limited Company
Discussion
I have some properties that are owned outright by my Limited Company and was wondering what the potential Inheritance Tax (IHT) implications are for my daughter in the future. I naively thought that the assets are the Limited Company's, therefore would not be subject to IHT, but I think that I may be wide of the mark and need to start thinking about a way of reducing the tax liabilities. One way of doing this could be to transfer the company shares over to my daughter now, but I am not convinced that it will have the desired effect and it could open up other problems now including Capital Gains Tax. I will take professional advice on this, but first of all I would like to ask the great and good of Pistonheads because there seems to be quite a few companies that want considerable amounts of money up front, to get you on the hook, but provide no insight into what options may be available.
Thank you in advance.
Thank you in advance.
First off, I’m not an accountant.
IHT is payable by your estate when you die. It is due if your estate is over a threshold value.
If properties are held in a company that you own the share in, then you own shares and the company owns properties. When you die the shares will be part of your estate and valued. The value of the shares may end up being reflective of the value of the properties. If your estate is over the IHT threshold, it will be liable for IHT. Whoever you choose to leave the shares to in your will will take the shares and thereby acquire ownership of the companies.
So yes, your estate may have an IHT issue when you die if the value of the shares reflects the value of the companies’ properties, and your shares put your estate over the IHT threshold.
You can gift your shares to your daughter while you’re alive. That will trigger a CGT liability for you, being based on the difference between the value of the shares when you acquired them and the value of the shares when you gift them. Bear in mind that since you will have gifted the shares rather than sold them, you won’t have proceeds of sale from which to meet the CGT liability. You’ll have to find money to pay that from elsewhere.
A gifted asset will only fall completely outside your estate for IHT purposes if you outlive the gift by 7 years. Between the date of the gift and 7 years there’s a sliding scale of IHT liability depending on when you die in that 7 year window.
You could get lucky by making the gift, outliving it by 7 years, and so having to pay CGT on the gift but avoiding IHT. Or you could get unlucky, and be run over the day after the gift. Then you’ll pay CGT on the gift and your estate will be liable for IHT on the gifted asset as if it were still part of the estate.
Someone who’s an accountant will no doubt be along soon.
IHT is payable by your estate when you die. It is due if your estate is over a threshold value.
If properties are held in a company that you own the share in, then you own shares and the company owns properties. When you die the shares will be part of your estate and valued. The value of the shares may end up being reflective of the value of the properties. If your estate is over the IHT threshold, it will be liable for IHT. Whoever you choose to leave the shares to in your will will take the shares and thereby acquire ownership of the companies.
So yes, your estate may have an IHT issue when you die if the value of the shares reflects the value of the companies’ properties, and your shares put your estate over the IHT threshold.
You can gift your shares to your daughter while you’re alive. That will trigger a CGT liability for you, being based on the difference between the value of the shares when you acquired them and the value of the shares when you gift them. Bear in mind that since you will have gifted the shares rather than sold them, you won’t have proceeds of sale from which to meet the CGT liability. You’ll have to find money to pay that from elsewhere.
A gifted asset will only fall completely outside your estate for IHT purposes if you outlive the gift by 7 years. Between the date of the gift and 7 years there’s a sliding scale of IHT liability depending on when you die in that 7 year window.
You could get lucky by making the gift, outliving it by 7 years, and so having to pay CGT on the gift but avoiding IHT. Or you could get unlucky, and be run over the day after the gift. Then you’ll pay CGT on the gift and your estate will be liable for IHT on the gifted asset as if it were still part of the estate.
Someone who’s an accountant will no doubt be along soon.
BlackWidow13 said:
You can gift your shares to your daughter while you’re alive. That will trigger a CGT liability for you, being based on the difference between the value of the shares when you acquired them and the value of the shares when you gift them. Bear in mind that since you will have gifted the shares rather than sold them, you won’t have proceeds of sale from which to meet the CGT liability. You’ll have to find money to pay that from elsewhere.
Interesting. If you give something away, you pay CGT on the amount the item increased in value during your ownership, even though you're not getting any money for it? How extraordinary.Granadier said:
BlackWidow13 said:
You can gift your shares to your daughter while you’re alive. That will trigger a CGT liability for you, being based on the difference between the value of the shares when you acquired them and the value of the shares when you gift them. Bear in mind that since you will have gifted the shares rather than sold them, you won’t have proceeds of sale from which to meet the CGT liability. You’ll have to find money to pay that from elsewhere.
Interesting. If you give something away, you pay CGT on the amount the item increased in value during your ownership, even though you're not getting any money for it? How extraordinary.If the daughter works in the company, maybe share options are a possibility?
Granadier said:
Interesting. If you give something away, you pay CGT on the amount the item increased in value during your ownership, even though you're not getting any money for it? How extraordinary.
It's to prevent abuse of the system. Otherwise you just give it away - they they give it back to you & the gain has disappeared.I'm pretty sure business relief won't apply if the company only really holds property so you have limited options on what to do.
What to do depends very much on value... are we talking just a bit over the IHT relief threshold or a long way?
If it's a long way, pay someone for proper advice. IHT rules change and you don't want some out of date advice from someone on the internet.
If it's just a little bit then you want to try and reduce the value at the time of your death, which you can do a few ways. As someone else suggested, you could gift a few shares each year to make sure you use your CGT allowance on the gain. If you don't have enough shares in issue today to do this just organise a share split. Or buy life insurance of an amount sufficient to cover the expected IHT bill.
What to do depends very much on value... are we talking just a bit over the IHT relief threshold or a long way?
If it's a long way, pay someone for proper advice. IHT rules change and you don't want some out of date advice from someone on the internet.
If it's just a little bit then you want to try and reduce the value at the time of your death, which you can do a few ways. As someone else suggested, you could gift a few shares each year to make sure you use your CGT allowance on the gain. If you don't have enough shares in issue today to do this just organise a share split. Or buy life insurance of an amount sufficient to cover the expected IHT bill.
The value of the property in the company is a fair amount above the IHT threshold. My daughter already has a 33% share allocation, but that was simply done by updating the share allocation information on Companies House when she became 18 years of age At no point did I have to declare the value of the properties in order to do that, so perhaps I am missing something through my own ignorance.
BAMoFo said:
The value of the property in the company is a fair amount above the IHT threshold. My daughter already has a 33% share allocation, but that was simply done by updating the share allocation information on Companies House when she became 18 years of age At no point did I have to declare the value of the properties in order to do that, so perhaps I am missing something through my own ignorance.
Indeed, you can transfer shares easily but that doesn't mean there aren't tax consequences... you should have calculated a gain on disposal and declared that to HMRC at the time. There probably should have been stamp duty paid as well on the transfer.If your daughter already has a 33% share of the company then the relevant value for IHT is going to be 67% of the total company value (which, I assume, is only that of the properties from what you've said). Just to be clear, as the title of this thread suggests some confusion, the asset YOU own is shares in the company and IHT will apply to the value of those shares. Yes, the value of the properties is a key part in determining the value of the shares but you do not own the properties. You own 67% of a company which owns the properties.
I would still suggest you take proper advice but there are a couple of things that come to mind.
1. Borrow against the company shares, gift the cash to your daughter and hope you survive 7 years. Hopefully there is some yield on these properties that could be used to service the interest.
2. Borrow again, but this time buy assets that would be eligible for IHT relief (i.e. business property relief)
I'm sure there would be other strategies involving trusts etc. but they all cost money to implement and depending how long you will survive could end up costing more than the tax saved.
Edited by hooters123 on Thursday 12th January 20:49
Firstly I would regularise the position somewhat by paying stamp duty on the share transfer.
If it is a trading entity ( a property company is not ) it is iht exempt ( subject to the small print ).
I don’t know how old you are , but You may wish to consider if there is a viable path to making it a trading entity.
If it is a trading entity ( a property company is not ) it is iht exempt ( subject to the small print ).
I don’t know how old you are , but You may wish to consider if there is a viable path to making it a trading entity.
lost in espace said:
You can always take life insurance to cover inheritance tax.
And if you do relevant life you can offset the premiums against the ltd co profits as an allowable expense. The policy proceeds are assigned to a trust for the beneficiary so there is no iht on the pay out an not a trading receipt.Many life polices are not in trust and the proceeds can be added to the estate and lose iht. Joint policies are not effective in trust unless joint life, second death which is rare (although correctly written iht policies are done that way)
Thank you, the ife insurance policy advice sounds interesting. I am 51 years old and have never bothered with life insurance before because I am fortunate enough to own everything I have oiutright. My dependents would always have been very comfortable in the event of my death, so I didn't see any value in paying an insurance premium.
Thanks again for the information. I will seek specialist advice and can at least feel a bit more informed about the options available.
Thanks again for the information. I will seek specialist advice and can at least feel a bit more informed about the options available.
Granadier said:
BlackWidow13 said:
You can gift your shares to your daughter while you’re alive. That will trigger a CGT liability for you, being based on the difference between the value of the shares when you acquired them and the value of the shares when you gift them. Bear in mind that since you will have gifted the shares rather than sold them, you won’t have proceeds of sale from which to meet the CGT liability. You’ll have to find money to pay that from elsewhere.
Interesting. If you give something away, you pay CGT on the amount the item increased in value during your ownership, even though you're not getting any money for it? How extraordinary.OP you need to look into Hold Over Relief, it is possible to gift shares to your children without CGT being liable in certain circumstances. It is how I gifted some shares to my kids. Same as a normal Gift as in liable to IHT if gifted within seven years of death.
https://www.gov.uk/gift-holdover-relief
Edited by Cheib on Friday 13th January 19:41
I've been looking into similar issues.
1- first establish if the company qualifies as a trading company or an investment company. You can google info on this.
2 - if it's unlikely to qualify as trading, consider if steps can be taken to make it qualify, or whether you sell the properties and employ the cash in trading activities.
3 - if the company has other genuine trading activities, maybe consider demerging the non-trading assets out?
4 - if not practical, consider whether gifting the shares, possibly with holdover relief. You have to pay attention to making sure you don't remain the effective beneficiary of the company's income etc, or this gift can fall prey to gifts with reservation.
1- first establish if the company qualifies as a trading company or an investment company. You can google info on this.
2 - if it's unlikely to qualify as trading, consider if steps can be taken to make it qualify, or whether you sell the properties and employ the cash in trading activities.
3 - if the company has other genuine trading activities, maybe consider demerging the non-trading assets out?
4 - if not practical, consider whether gifting the shares, possibly with holdover relief. You have to pay attention to making sure you don't remain the effective beneficiary of the company's income etc, or this gift can fall prey to gifts with reservation.
I’m not an expert in this, but just curious,
Instead of gifting shares in the ltd company, why not issue more shares to raise share capital, which your daughter purchases?
You keep your shares, so no no cgt due?
Your daughter gets ownership of x %.
Value of your share(s) is decreased, possibly avoiding or at least decreasing IHT liability?
Is there a reason that this wouldn’t work - either tax based or ltd company legislation based?
Instead of gifting shares in the ltd company, why not issue more shares to raise share capital, which your daughter purchases?
You keep your shares, so no no cgt due?
Your daughter gets ownership of x %.
Value of your share(s) is decreased, possibly avoiding or at least decreasing IHT liability?
Is there a reason that this wouldn’t work - either tax based or ltd company legislation based?
Edited by GiantCardboardPlato on Saturday 14th January 17:53
GiantCardboardPlato said:
I’m not an expert in this, but just curious,
Instead of gifting shares in the ltd company, why not issue more shares to raise share capital, which your daughter purchases?
You keep your shares, so no no cgt due?
Your daughter gets ownership of x %.
Value of your share(s) is decreased, possibly avoiding or at least decreasing IHT liability?
Is there a reason that this wouldn’t work - either tax based or ltd company legislation based?
I’d imagine HMRC have rules about that otherwise it would be rife. HMRC can also change rules and take retrospective action so if a loop hole is abused so you’d have 7 years before you knew you’d got away with it. Instead of gifting shares in the ltd company, why not issue more shares to raise share capital, which your daughter purchases?
You keep your shares, so no no cgt due?
Your daughter gets ownership of x %.
Value of your share(s) is decreased, possibly avoiding or at least decreasing IHT liability?
Is there a reason that this wouldn’t work - either tax based or ltd company legislation based?
Edited by GiantCardboardPlato on Saturday 14th January 17:53
Sorry for the thread resurrection - was looking at starting a similar thread, but can see it has been covered.
OP, what did you decide to do in the end?
Shares can have different values for CGT and IHT as the market value when you don't have majority control for example in a family company can be argued to be quite low.
In terms of issuing new shares, nothing seems to come up online mentioning this which is strange!
OP, what did you decide to do in the end?
Shares can have different values for CGT and IHT as the market value when you don't have majority control for example in a family company can be argued to be quite low.
In terms of issuing new shares, nothing seems to come up online mentioning this which is strange!
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