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Some Inheritance Tax Traps

“I am a married man with non-business assets(including my home) of just below £1 million.My business assets (including my interest in business premises) are probably worth £1.5 million.

“We are leaving our estates to each other on the first death and then to the children on the second. Business assets are covered
by business property relief so there will be no inheritance tax payable on the second death.” (ECD – Elderly company director).

True or false?

The likelihood is that there will be quite a lot of tax to pay on the second death.

ECD knows that he and his wife each have a nil rate band which currently stands at £325,000 provided they have made no significant gifts in the last 7 years. He is dimly aware that the Government has given him another tax-free band of £175,000 subject to some rather complex rules. He is also aware that unused nil rate bands are transferable between spouses if required. Why – £325,000 plus £175,000 x 2
spouses adds up to £1 million!

ECD has failed to grasp two fundamental issues when calculating inheritance tax:

  1. True, the residence nil rate band (currently £150,000
    rising to £175,000 on 6th April 2020) is available to each
    spouse provided that on the second death the property
    (or the proceeds of sale of the property) is left to the
    children. But he has overlooked the fact that where the
    total gross estate exceeds £2m on the second death the residence nil rate band is restricted. Once the total
    estate value exceeds £2.35m this relief will be reduced
    to nil.
  2. Not all business assets qualify for 100% business
    property relief. For example, ECD has quite a lot of cash
    tied up in his director’s loan account. There’s no relief
    available on loan account balances.

And there will be only 50% relief for his interest in the business premises (and possibly no relief at all if he gives some shares away and ceases to be a controlling shareholder).

Is there anything ECD can do to salvage his position? There most certainly is…

C&H Stedman

For more info, give us a call on 01442 202650

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