Giving consideration to whether you can put plans in place now is a valuable tool, which can minimise or in some cases eliminate Inheritance Tax from being due on your estate. Remember, although your business may qualify for exemptions today, it would still need to be trading on the date of your death, so any sale or liquidation in the meantime would mean the value is in your estate and caught for inheritance tax.

At Jerroms, we consider your whole estate and advise on real solutions that can be implemented – some of the more common planning scenarios are explained in more detail below, but as you can imagine, everyone’s circumstances are different.

Common Planning Scenarios:

Scenario 1: Grandparents Trust Planning (sometimes called school fee planning)
A limited company, ABC Limited, is owned by Mr and Mrs Smith. They help their children out by paying school fees for their grandchildren. Instead, it is possible to set up a trust for the benefit of the grandchildren (and possibly the children) and to gift shares into the trust. The trust can then declare dividends to each grandchild, using their personal tax-free allowances and basic rate tax bands. These dividends can then be used to pay the school fees, meaning that the profits have been extracted from the company tax-free. If the shares also have capital rights, then a proportion of capital value is often passed onto the younger generations, reducing your estate for Inheritance Tax purposes. The IHT saving depends on the capital value, and there can be significant income tax savings throughout the period whilst the beneficiaries are minors (and some smaller savings thereafter). 

Scenario 2: Double Dip Trust Planning
ABC Limited is owned by Mr & Mrs Smith, and their two sons also work in the business and will continue to do so throughout their lifetimes. Mr & Mrs Smith have investment assets worth £ 5m, a similar value to their share of the business. It is possible to structure the wills in a way that allows for assets to be distributed into a trust structure following the first death, and reallocated in a way that completely negates Inheritance Tax, even on the second death. This solution is most effective where the trading company is likely to remain trading post the death of Mr & Mrs Smith – so is of real benefit to the family company scenario. Based on the investment value of £ 5m, the potential IHT saving is £ 2m.

Scenario 3: Investment Property / Assets
Mr & Mrs York have built up a cash balance of £ 500,000, which they do not need. They could give this outright to their children, and as long as they survive 7 years (under current rules) this would be outside their estate for Inheritance Tax.
However, if the recipient gets into matrimonial or financial difficulties, the capital value is in jeopardy. One solution is to gift the asset into a trust instead and allow the trust to either invest or possibly loan the capital value to the beneficiary. This means that the capital value is protected, and you as trustee retain some control over the funds. Assuming they survive 7 years, the IHT saving is £ 200,000.

Scenario 4: Growth Shares
Mr & Mrs York have a trading company worth £ 2m. It is expected that in 5 years this will be worth £ 5m, at which point they will sell the company and enjoy their retirement. Once they sell the company, they intend to give half of the money to their adult children. It would be recommended to issue some growth shares to the children now, which would ringfence any further growth in the company value, and result in this being payable to their children directly on a sale, as opposed to a gift by them, which they then need to survive 7 years from to avoid inheritance tax. Let's say growth shares dictate that once the value reaches £ 2.5m, any excess is attributable to the growth shares – this means that potentially £ 2.5m (assuming the £5m sale price) has passed directly to the children and avoided a potential £ 1m Inheritance Tax.

If you would like to discuss inheritance tax and estate planning, please do not hesitate to contact Kate Moon (This email address is being protected from spambots. You need JavaScript enabled to view it.) to talk things through.