Tax Free to IHT

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 (IHT) reliefs;

• On exit, disposal proceeds will usually qualify for a reduced 10% CGT rate by virtue of Entrepreneurs’ Relief, or be exempt altogether if the investment qualifies under The Enterprise Investment Scheme.
• Prior to exit, the shares qualify for 100% Business Property Relief (BRP) after two years ownership and are therefore effectively free from IHT in the event the entrepreneur himself exits prematurely while still holding the shares.

The successful entrepreneur can therefore grow and realise significant value in a low tax environment.

But what is the temporary protection from IHT 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 converters an asset protected from IHT into an asset for which there is no relief. The value of the entrepreneur’s estate on which IHT would be payable can increase dramatically on exit. More and more estates are being brought within IHT each year as the combined Nil Rate Band of a married couple for IHT continues to be held at £650,000 despite inflation, with the excess being charged at 40%.

Perhaps the question for entrepreneurs who don’t consider IHT planning and pre-exit should be – would I be happy in the event that the consideration is 40% lower? This would be the equivalent of incurring a charge to IHT post-sale if the worst was to happen.

There are many options to consider prior to exit that give protection to entrepreneurs and their family from unexpected IHT charges as well as facilitating the transfer of wealth to the next generation. These include;

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

Whether you are considering an exit in the near future or have already, it is not too early to start managing your exposure to IHT.

For more information, contact Graeme Allan, Partner, Graeme.allan@aab.co.uk