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There are many ways to pass on the family business to the next generation. Circumstances will vary, but here are some tips to help you decide which route is the best one for you.
Every individual has a £1m lifetime allowance for BADR. Gains qualifying for BADR are taxed at 10% as opposed to the top rate of 20% so using your BADR can save you up to £100,000 in capital gains tax.
If the company itself purchases the shares, cash can be received and BADR claimed. There are various conditions that need to be satisfied and clearance from HMRC should be sought in advance.
Gifts to family members are usually deemed to be made at market value and this can crystallise an unwanted tax charge when no actual cash has changed hands. However, where the gifts are of unquoted shares in a trading company, any deemed gain can be ‘held over’ therefore not incurring a capital gains tax charge.
When gifting shares to adult children who also work in the company, be aware that there is complex legislation surrounding Employment Related Securities (ERS) – basically, where shares are given to employees the value of those shares can be subject to income tax. HMRC will accept that ERS does not apply to ‘genuine’ gifts from parents to children, but we would always recommend getting an informal clearance from HMRC that this is the case.
If you still want to retain control of the company, but give away the shares, consider using a trust. You can be the trustees of the trust and effectively retain control of the company through the voting rights attached to the shares.
Most shares in trading companies will qualify for 100% BPR, which effectively exempts the value of the shares from IHT. Make sure that the company does not hold any non-business assets as this may restrict the amount of BPR available.
Where a company undertakes a mixture of trading and investment activities it is often unclear whether BPR is available, and it is also not possible to obtain a ruling from HMRC in advance. In these circumstances it is sometimes possible to ‘test the water’ by, for example, transferring some shares into trust, claim BPR and see if HMRC accept it.
A DLA is not a business asset for BPR purposes and is therefore liable to IHT in full (potentially at 40%). However, if the cash balance in the DLA is converted to shares, these can potentially qualify for BPR after two years. The shares can then be gifted to family members free of IHT.
if you have any questions with regards to passing on a family business please do not hesitate to get in touch with our tax experts today.
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