Managing your inheritance tax exposure

The successful entrepreneur is accustomed to enjoying a range of tax breaks, with shares in their unquoted trading company benefiting from both capital gains tax (CGT) and inheritance tax reliefs.

Business sale proceeds will usually qualify for reduced 10% CGT rate by virtue of entrepreneurs’ relief, or be exempt altogether if it qualifies under the Enterprise Investment Scheme. Prior to the exit, the shares qualify for 100% business property relief (BPR) after two years.

They are effectively free from inheritance tax should the entrepreneur exit prematurely, while still holding shares.

Successful entrepreneurs can, therefore, grow and realise significant value in a low-tax environment. But what is the temporary protection from inheritance tax offered by BPR really worth when the intention and likelihood is to realise the investment for cash?

The disposal of shares in a trading company for cash converts an asset protected from inheritance tax into an asset for which there is no relief. The value of the estate on which inheritance tax would be payable can increase dramatically on exit.

More and more estates are being brought within inheritance tax relief every year as the combined nil rate band of a married couple continues to be held at £650,000 despite inflation, with the excess being charged at 40%.

For example, a couple with two children have a house plus other assets worth £650,000 and shares in their trading company which qualify for BPR. Their combined inheritance tax exposure is nil.

When the company is sold, they realise £3million net of taxes and the taxable estate increases to £3.65million. The potential inheritance tax liability is £1.2million and the children inherit the post-tax estate of £2.46million.

There are many options to consider prior to exit that give protection to entrepreneurs and their families from unexpected inheritance tax charges.

These include:

• Pre-exit planning to retain the value of BPR post-sale
• Lifetime gifts
• Tax efficient investments
• Re-investment in new qualifying businesses
• Inheritance tax protection insurance

Whether you are considering an exit or have already, it is not too early to start managing your exposure to inheritance tax.

For more information contact Derek Mitchell, a tax director with Expertise to Entrepreneurs (E2), a division of AAB (Derek.mitchell@aab.co.uk)