Through the implementation of tax planning procedures, our Property team in Bristol helped a client reduce a potential liability – saving more than £27m.
Our Property team recently advised a new client on planning procedures for inheritance tax (IHT) and capital gains tax (CGT). The client was operating his business through a group comprising two limited companies, and he also held substantial personal assets. He had not considered IHT planning to any major extent. Furthermore, the companies had a number of income streams comprising a mixture of trading and investment activities, with a particular emphasis on property. Planning ahead Have you considered the future tax implications of your current business structure?
The Potential Liabilities
As there were substantial investments within the group, the shares in the parent company did not qualify as a trading entity for the purposes of IHT business property relief (BPR). Furthermore, the future sale of the subsidiary would produce a substantial chargeable gain, taxable at 30%. If the status quo had not been questioned, the client's executors would have faced significant tax liabilities, including a potential IHT liability of around £27m and a CGT liability of approximately £5m.
Solving The Problem
Our team was appointed to help, and our specialists in corporation tax, IHT and VAT worked together to identify a solution. We suggested that the group be restructured into two separate entities.
- A trading group eligible for BPR, therefore making the shares exempt from IHT. This also introduced the possibility of applying the Substantial Shareholdings Exemption to any chargeable gains arising on a future sale of the trading subsidiary, so that no corporation tax would be payable.
- A property development group, including a restructuring of assets held. This entity would be eligible for BPR as its business does not consist wholly or mainly of dealing in land or investments.
This new arrangement effectively removed the whole of the value of the shares from the chargeable IHT estate, leaving IHT potentially payable on only personally owned assets. However, exposure to this liability can be mitigated through the use of trusts.
Through the use of these tax planning procedures, we helped reduce the client’s potential tax liability from more than £30m to less than £3m.
Planning For The Future
It is important to consider the totality of your business and investment activities to determine if they have been structured to mitigate future IHT and CGT liabilities. If you are unsure, it is best to seek professional advice to help you identify the optimal structure.
We deal with the tax affairs of a large number of owner-managed businesses with substantial property activities. Our experience allows us to help companies and their owners minimise their potential tax exposure.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
