Tax Doctor:
Mark McLaughlin
CTA (Fellow) ATT TEP

Have you got a tax question? Post it on the Tax Tips Forum and it may be answered either by Mark McLaughlin or one of the other Forum contributors.

August 2005

Q:

I need some inheritance tax (IHT) advice. I am 76 year old widow, and I understand that the value of my estate means that IHT will be payable when I die. My only son owns a trading company, which needs money to expand. I have already provided for him in my Will. However, is there anything I can do in my lifetime to help him and his business? Should I gift money directly to him, or put money directly into his company?

A:

You could make a cash gift to your son. For IHT purposes, the gift would be a 'potentially exempt transfer' (PET). This means that the amount or value of the gift falls outside your estate and escapes IHT completely if you survive at least for at least seven years. If you do not survive this seven year period, the gift will be taken into account when determining the IHT liability on your estate on death. However, there is a measure of IHT relief on the gift if you survive for at least three years (but less than seven years). Any IHT on the gift is reduced ('tapered') by a percentage according to the number of years you survive following the gift.

You mention the possibility of injecting funds into the company instead. This could be through a loan (which could later be written off if you wish), or an outright gift. If you make a loan to the company, the loan will be an asset of your estate for IHT purposes if it is still outstanding when you die. If the loan is written off during your lifetime, it will be treated in the same way as an outright gift at that point. However, the gift would not be treated as a PET. The release of the loan would be immediately chargeable to IHT, subject to the annual IHT exemption (i.e. £3,000 for 2005/06) and your available 'nil rate band' (i.e. £275,000 for 2005/06) to the extent that they have not already been used elsewhere. You should also bear in mind that a gift or loan to the company will benefit all the company's shareholders, not just your son.

An alternative to gifting money to your son for his business or to the company directly is to invest in shares in his company instead. For IHT purposes, there is no gift as you will be subscribing for shares on a commercial basis. The value of your shares will form part of your estate. However, there is IHT relief ('business property relief') (BPR) for shares in an unquoted trading company. The rate of relief is 100% if certain conditions are satisfied. In particular, the shares must be held for a minimum period of two years. Of course, this holding period compares favourably with the seven year period for a cash gift to your son to escape IHT completely. You could then leave the shares to your son in your Will.

Business property relief is automatic if the relevant conditions are satisfied. However, it is not generally available if the business consists wholly or mainly of dealing in stocks and shares, land and buildings or holding investments (e.g. let property). In addition, the value of relevant business property attributable to excepted assets does not qualify for BPR. 'Excepted assets' include investments and excessive cash deposits held by businesses or companies which are not used wholly or mainly for the business throughout the immediately preceding two years (or since acquisition, if earlier), and which are not required at the time of transfer for future use in the business. As the company needs money to expand its trade, it seems unlikely that excessive cash deposits will be an issue. However, excepted assets can include land and buildings that generate rental income (e.g. old trading premises yet to be sold), so you should be fully aware of the company's assets (and liabilities) before investing.

Finally, you should bear in mind that buying shares in your son's company is an investment, like any other shares and securities. Specific professional advice is recommended.

Mark McLaughlin

Your attention is drawn to the disclaimer on this site, which applies to the content in this section.

<< back to Tax Doctor index | go to Tax Tips Forum >>