Gifting and Investment

Effective inheritance tax planning generally revolves around gifting or appropriate investment. Typically a sophisticated client will require a combination of the two. A client generally needs to have survived the making of a gift by seven years to ensure that the subject matter of the gift cannot form part of their estate for inheritance tax purposes. Additionally, in the event of investing in something that will attract relief from inheritance tax, they will need to have made that investment more than two years before their death and held it until the time they die.

The obvious concern that we have given these rather strict timetables is the case of a client receiving a terminal diagnosis and a prognosis that they are not even expected to survive the two-year period. Insurance for such a client would be difficult (if not impossible) to obtain, and it is tempting at that point to give up on inheritance tax planning altogether.

Planning opportunity

There is a somewhat little known legislative point, however, which can be of assistance.

It is not uncommon for us to act for the owners of limited company businesses in which a parent or parents own a small share. These shares may have been given in return for providing start-up capital.

If the shares in the business qualify for business property relief from inheritance tax this, at the very least, means that that small shareholding will be relieved from inheritance tax. Of course, this might be a very minor aspect of the individual’s estate.

Rights issue

The reorganisation of capital rules (which you can find in Part IV, Chapter II of the Taxation of Capital Gains Act 1992 and Section 107(4) Inheritance Tax Act 1984) can be of use here. The rules provide that if the company carries out a rights issue and the client in question takes up shares to which he is entitled from that issue – which shares must be directly connected to his initial shareholding – this further shareholding immediately qualifies for business property relief without the two-year waiting period.

There are undoubtedly practical difficulties associated with this. The client must have the spare capital to be able to make such an investment and, further, the business must be able to demonstrate that there is a business case for attracting this investment. Fortunately, the vast majority of businesses can find a reason to spend money!

By way of forward planning, it is often a good idea to consider whether clients who own businesses should give a very small number of shares to their parents with a view to future inheritance tax planning.

Further information

We will be putting on a seminar in 2018 covering this particular topic in more detail. If you consider that it might be of interest, please get in touch with James Hall or please attend our seminar to find out more.