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Inheritance tax relief on business assets

Inheritance tax (IHT) is payable at 40% on the net value of the assets you own when you die, plus (to a certain extent) on the value of the gifts you made in the seven years before you die. The first £325,000 of assets is currently exempt from IHT in all cases.

There are also exemptions from IHT for business assets, such as shares held in unquoted companies. However, you cannot escape IHT by holding all your investments and spare cash inside your personal company. The business of the company must be more than passive holding of investments, and the Taxman normally regards letting property as an investment, but this is a grey area.

Even where your company has an active trade, it doesn’t follow that the full value of its shares will qualify for the IHT exemption. The Taxman wants to look inside the company and check that each asset it holds, including cash, is used for the purpose of the trading business.

This can cause difficulties for companies which hold more cash than is needed for everyday working capital. If your company is in this position, to get the IHT exemption you need to form some plans for use of the funds within the business and document those plans.

The IHT exemption applies where the shares of the trading company are held by individuals, or where a holding company holds the shares, and shares in that holding company are held by individuals. However, where the holding vehicle is a general partnership or an LLP, instead of a company, the IHT exemption does not apply.

Inheritance tax loan change

A change in the way loans are treated for inheritance tax (IHT) purposes could increase the taxable value of your estate on death, and the amount of IHT payable. This change will affect IHT calculated on deaths occurring after the Finance Act 2013 is passed, but applies to loans which are already in place.

At present any debts owed by the estate are deducted from the net estate after reliefs, such as business property relief (BPR), have been given. Broadly BPR provides 100% or 50% relief from IHT on the value of your business assets and unquoted shares. After the Finance Act 2013 is passed, the value of a loan must be deducted from the asset it was used to acquire.

Say in the past you increased the loan on your home to invest in your business, and that loan is still outstanding on your death. To calculate the IHT due that business part of the loan must be deducted from the value of your business and not from the value of your home. This reduces the value of your estate exempt from IHT under business property relief, and increases the taxable value of the remaining estate.

Also if the loan owing at death is not actually repaid by the estate to the creditor after death, that loan can’t be deducted from the estate at all, unless there is some commercial reason for not repaying the loan.

Remember IHT is payable at 40% on the taxable value of your estate that exceeds £325,000. A lower rate may be payable if you leave at least 10% of your net estate to charity. There are other ways of mitigating IHT, but we need to discuss your individual circumstances to formulate a plan.