Peter Rayney shares a recent succession planning story.
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Henry was at home convalescing from a recent bad bout of flu. Being forced to take some time off away from his business gave a rare opportunity for Henry to think about the future of ‘his’ transport logistics business.
Setting the scene
The company was currently worth some £4m. Henry was 64 years old and owned 100% of H Tudor Logistics Ltd (HTLL). He had a life partner of some 10 years (Anne), but she had no involvement in the company.
Henry looked after the operational side of the firm. He also had a daughter – Mary (now 30 years old) from his earlier marriage.
Mary worked in the business, covering finance and administration roles. She was a single parent with one five-year-old daughter (Lizzie).
The Autumn Budget 2024 and the ensuing press coverage had made Henry very nervous. It had always been Henry’s intention to pass the company down to his daughter, Mary. He thought this would not ‘involve’ any inheritance tax (IHT) because 100% business property relief (BPR) would be available when the time came to hand over the company to her. However, he was now shocked to find that 100% BPR would only be available on the first £1m of value. He would also effectively be paying some 20% IHT on the ‘excess’ value of some £3m!
He needed to speak to his trusted accountant (Thomas of Cromwell & Co), and he arranged to have a ‘Zoom’ call with him that afternoon, as he did not like to have such things hanging in the air.
The ‘Zoom’ call
At the start of the call, Thomas confirmed that Henry’s understanding of the IHT position was correct. Thus, if Henry died after 6 April 2026, he would be looking at a massive IHT liability on his 100% shareholding in HTLL.
Henry ranted, “I have worked very hard all my life to build up a successful business and I am now being punished by an IHT liability of some £600,000 – it’s a disgrace! How are we going to find the money to pay that?” (NB. HTLL share value of £4m less £1m 100% BPR = £3m less 50% BPR = IHT chargeable value of £1.5m x 40% IHT = £600,000].
Thomas replied, “I agree the BPR changes have come as a great shock to us all since they have been very generous and remained intact for many decades – I believe you can opt to pay it in 10 annual instalments, but that still is a lot of cash to find each year?”
Transferring shares to Mary
Henry then asked Thomas if there was anything that could be done to reduce his potential IHT bill. They explored the possibility of passing some shares – maybe a 30% holding – now to Mary to recognise her important contribution to the business. This would also be a sensible step towards Henry’s succession and IHT planning.
Thomas explained how this might work: “So, you would gift 30 shares to Mary out of your current holding of 100 shares. This would be treated as a potentially exempt transfer or PET for IHT purposes. This means that provided you lived for at least seven years after the gift was made, it would be completely ignored for IHT purposes. You would not need to use any of your £1m 100% BPR ‘allowance’. Since you are otherwise in good health – and you are recovering well from the flu – relying on you surviving the next seven years seems like a reasonable risk.”
“And what if I did depart from this mortal coil?” quipped Henry.
“OK – hypothetically of course – if you died within seven years, the gift of shares to Mary would become a chargeable IHT transfer and added to your taxable estate on death. Let’s look at that” – Thomas proudly shared his screen and used the ‘whiteboard’ to show the following calculations.
Estimated value of 100% holding in HTLL pre-transfer = £4m
LESS: Estimated value of 70% holding in HTLL POST-transfer = say 2.4m (being £2.8m less 15% discount of £420,000)
Transfer of value - £1.6m but
Assuming HTLL shares were still held by Mary on Henry’s death, this would be ‘sheltered’ by £1.3m worth of BPR as follows
100% BPR - £1m x 100% = £1m
50% BPR - £600,000 x 50% = £300,000
Taxable value is therefore some £300,000 but likely to be covered by possible taper relief or nil-rate band.
Thomas continued, “So, you can see from the figures, assuming you died within seven years, there is likely to be some IHT to pay. The amount would depend on various factors. For example, special ‘anti-forestalling’ rules may apply, since the gift to Mary is made after the Autumn Budget 2024. Assuming you died after 5 April 2026, your £1m 100% BPR allowance would be used up on the failed PET”.
“But it is important to look at the bigger picture, Henry. The chances are that you would comfortably live seven years and beyond and this planning is much better than doing nothing. The lifetime gift would also be a really attractive morale-boosting event for Mary. Furthermore, you would reduce your own shareholding and this itself would save a lot of IHT when the time comes”.
“Just for completeness”, Thomas added, “the gift would also trigger a capital gains tax (CGT) disposal of a 30% holding, based on the market value of that shareholding in isolation (not the same ‘reduction in estate’ valuation method we used for IHT on the failed PET). However, since HTLL would be a ‘qualifying trading company’, you can enter into a ‘business asset’ holdover election with Mary, which would avoid any immediate CGT charge. In fact, the HMRC holdover relief form (Help sheet HS295) also allows you to avoid calculating a market value since the net effect of the relief is to pass your original base cost in the shares on to Mary!”
Gifting shares to Anne
“That all sounds very doable – let’s go for it”, Henry concluded. “What about giving some shares to Anne – would that improve our IHT position?”
Thomas explained, “Of course, Anne would also have a 100% IHT BPR ‘allowance’, so it makes sense to use it and this would reduce the overall IHT burden. But remember, since you are not married to Anne, we would have to use the same IHT and CGT rules that we did for your daughter. Tax law does not recognise life partners or ‘common-law’ wives. Since you have known Anne for 10 years, it would make a lot of sense to marry her from a tax viewpoint. If Anne was married to you, a gift of shares to her would automatically take place on a CGT ‘neutral’ basis (without the need for any election). More importantly, the gift would also be completely exempt from IHT as it would be covered by the spouse exemption – so it would not require you to live more than seven years. Probably most important of all, you would be able to pass assets between yourselves on death free of IHT and you will also be able to transfer your unused nil-rate band to the other and so on. This means that your IHT tax issues only need to be dealt with on the death of the ‘surviving spouse’, which should give us more time for planning.”
Henry became quite excited. “I like it – thank you, Thomas – it has always been our intention to marry, but we’ve just never got around to it.”
Thomas replied, “Well, that is something for you to consider – but do not leave it till the last minute like Ken Dodd. Did you know ‘Doddy’ saved bucket-loads of IHT by marrying his life partner – who was also called Anne incidentally – just two days before he died?”
“I can see our time is almost up and we have not even covered how we might save more tax by using a family discretionary trust. Let’s discuss this soon – at least we now have some definite plans to make some sizeable savings in your IHT exposure. As always with these things, there is a balance to be struck. You need to be sure these steps work for you personally and, as I have said, we can also explore the use of a family trust for additional tax savings and asset protection.”
The Zoom call ended with Henry feeling a lot more positive about his succession planning and potential IHT issues…
Practical tip
Life is unpredictable – so it is best to ensure that any succession planning strategy remains sufficiently flexible to deal with changes in future circumstances and tax rules.
