May 14, 2025

Article

The October 2024 Budget introduced significant reforms to Inheritance Tax (IHT), which are poised to impact individuals and families with agricultural or business assets. These changes are likely to prompt a reassessment of existing estate planning strategies and the exploration of alternative mitigation strategies.

Potential Shift Towards Corporate Structures

One such strategy which some suggest is the use of Corporate Structures - This is because:

1. Utilising additional £1 million allowances

To utilise multiple £1 million allowances using eachindividual shareholder’s entitlement to the allowance,as shares in trading companies can qualify for BPR. Thisapproach could potentially shield a greater portion ofthe estate from IHT.

2. The impact of the reduced 50% rate of BPR

Historically partnerships have been an attractive vehicle to hold assets to secure 100% IHT relief, compared to companies, where the assets are held by individuals outside the company, only attracting 50% relief, (and only if the company is controlled by the asset owning individual). With 100% relief restricted to up to £1 million per individual and thereafter 50%, this will be less of a disadvantage from April 2026.

3. Control and flexibility

Given the increased need to pass assets on during lifetime, to mitigate the future potential IHT burden, a limited company can provide a degree of control and flexibility. Incorporation allows for centralised management of the business and assets, facilitating smoother succession planning and potential tax efficiencies, where the owners of the company may be different to those operating the business. For example, shareholder ownership could be in the hands of the next generation, whilst the directors running the company can be remunerated by way of salary to run the company business.

A shareholder’s agreement should also be considered to ensure voting powers are in the right hands and the decision making, ability to transfer shares and what happens when someone leaves, sells or dies is agreed.

4. Income

Where a donor gifts property onto the next generation to mitigate IHT, they must not reserve a benefit in the assets given away – i.e. continue to take an income or occupy the property.

Where assets are gifted into trust, the donor cannot be a beneficiary of the trust.

The use of a limited company can, in certain circumstances, enable future long-term extraction of capital from the company by the donor, tax efficiently, without falling foul of the gift with reservation of benefit rules.

5. Income Tax Planning

Companies can provide opportunities for business profits to be taxed at lower corporation tax rates, 19%-26.75%, which, in certain circumstances, may be taxed more favourably than personal income, where higher rates of tax apply.

6. Share discounts and growth shares

There are often higher discounts applied to the valueof shares, where a company is held in joint ownership, compared to discounts applied to shared ownership of property. This can help reduce the value chargeable in an individual’s estate. The use of freezer and growth shares can limit the future increase in value in an individual’s estate, allowing future increases to be in shares held by the next generation. This is particularly useful if the next generation is involved in the business, to incentivise them for their future input in the business.

7. No Trust ten-year charges

A company is not itself subject to the IHT regime, so there are no IHT ten year or exit charges. Instead IHT is charged on the death of the individual shareholders, which may enable both the utilisation of additional £1 million allowances but also spreading the timing of IHT over multiple individuals.

Other considerations and guidance

While incorporating assets can offer certain tax advantages, it’s crucial to consider the following:

  • Compliance and Administration: Operating a company entails regulatory obligations, administrative responsibilities, and associated costs.
  • Commercial Purpose Requirement: Like Partnerships, to qualify for BPR, the company must be engaged in genuine trading activities; investment activities typically do not qualify, unless the business is mainly trading.
  • Potential Future Legislative Changes: Tax laws are subject to change, and strategies effective under current legislation may be impacted by future reforms.
  • The Cost to Transfer the Business into a Company: It is often expensive to transfer property into a company with capital gains tax and stamp duty land tax payable, unless reliefs are available. Further, if property is gifted to the company, with the uplift in value held in other shareholders hands, this could be a chargeable lifetime disposal for IHT purposes.
  • Extracting cash to pay the IHT liability: where there is an IHT liability on the death of the shareholder, if cash is required out of the company to settle the liability, income tax will be payable. This could result in additional taxes which may be expensive.

Given the complexity and potential risks, it’s advisable to seek professional advice when considering the use of corporate structures. A company must be right commercially for the long-term operating of the business, and not purely for tax purposes.

Conclusion

The forthcoming changes to APR and BPR are set to alter the landscape of IHT planning significantly. For those with agricultural or business assets, exploring the use of corporate structures may offer viable avenues for mitigating IHT liabilities. However, such decisions should be made cautiously and in consultation with professionals to navigate the complexities effectively.

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