I’m trying to help a family with their BTL Ltd Company and the obvious IHT problem looming. Mum and daughter are both directors but the mother owns both shares and she is 76. Father passed away over 2 years ago so I’m not sure why the solicitor didn’t complete a deed of variation to transfer his one share to the daughter instead of the mother.
Company is worth circa £3.8 million (9 x properties worth £2.8m + retained earnings of £1m). Doing all the usual pension work and looking to potentially subdivide the shares into 1p shares or allot additional shares to the mother initially. Then gift shares each tax year to utilise the CGT A.E and her remaining basic rate tax band to bank cheaper tax rates but this isn’t scratching the surface.
Can any of you more esteemed members think of any trust work I could research to try and mitigate this rather large pending IHT liability? Client ideally wants everything to go to the daughter or to set up some sort of family trust. Unfortunately I have only just picked up this client and they are aware they have left things late.
Any suggestions (and your time) is gratefully received.
If the father’s share in the company had been redirected to the next generation by deed of variation, this would have incurred IHT whereas allowing the shares to pass to the widow has avoided liability at that stage and so long as she is in good health she will be able to make lifetime gifts in the hope of surviving for 7 years.
It is a pity however that the father’s shares were not put into trust for the wife as life tenant. The trustees could then release shares to beneficiaries from the trust free of CGT liability, in view of the rebasing of the shares on death. If such a trust had been set up by deed of variation, it would be necessary to wait at least 2 years before any appointments out could be made (IHTA s 142(4). Better still, the shares could have been split into smaller nominal values and then scattered over a number of trusts for the widow for life. Then the valuation rule for appointments out is that the shares in each trust are valued without regard to the shares held in the other trusts or the free estate, so that a small minority basis valuation for the PETS an be achieved. HMRC do not seem to have any objection to this type of fragmentation planning, presumably in the light of the Rysaffe Trustee Co decision [2003] STC 536.
As things stand straightfoward planning will involve gifts of minority interests every 6 years. This minimises the CGT on the gifts (TCGA 1992 s 19 not applying), but the potential IHT on the PETS if they fail and become chargeable is calculated by loss to the estate and not simply the minority value.
The GAAR guidance gives an example of the use of an employee trust to avoid IHT on a private investment company but the example is fairly extreme and can be accepted as abusive. However a decision of the GAAR advisory panel dated 2 March 2020, although confirming HMRC’s view in regard to a somewhat similar arrangement, noted that the use of an employee trust might not be caught in the case of an ‘ongoing substantive and active business’. In such a case, the employees would of course be the members of the family. Quite a few complex tax rules need to be negotiated to set this up.
I’d look at the fathers 50% holding that was transferred to the wife. I assume that 50% of the value of the company for CGT purposes is near Nil - assuming the share received an uplift on the fathers death. If the CGT is minimal now (date of death valuation - value today), the 50% shareholding could be transferred to a bare trust for the benefit of the daughter with no immediate charge to IHT (PET).
On the assumption she lives for 7 year (or takes a whole of life policy) this may work - at least remove 50% of the value from the company.
The company on the fathers death would not have qualified for BPR - we assume this why the spousal exemption was used and no DOV was executed.
Will not the share inherited be pooled for CGT purposes with that already held by the widow? In which case any disposal cannot be made looking only at the increase in value of the inherited share.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
As correctly stated by Paul, it is not now possible for the widow to give away the share inherited with the disposal being identified with the most recent acquisition - the share acquired is pooled with the share already held. Which is why it is necessary to have the share in the estate go into a trust for the widow if it is to be dealt with separately from her own holding. But unfortunately a transfer into such a trust now cannot be made without adverse tax consequences.
Malcolm Gunn