After thirty years of running the family property development business, Sammi is retiring.
She is gifting the entirety of the business equally to her son Chris, and her daughter Philippa, who have both been involved in running the business.
The company is currently in the process of a purchasing four flats for its property portfolio, so to help with the additional workload, Chris is moving back from Italy, where he has been living for the past ten years. On his return, Chris plans on marrying and starting a family with his fiancée Chloe. Additionally, Chris and Chloe are in the process of buying their first home together as first-time buyers.
However, having invested a number of years into the business herself, Philippa has expressed concerns about any claims Chloe may have on the company, and whether she is entitled to a share in it.
Tax Planning & Business Property Relief
How Sammi can limit her tax exposure
Private Client, Associate Jan Tyley looks into the challenge of tax planning when it comes to business inheritance
Sammi’s business has been very successful over the years and the company has grown in value considerably since its inception.
Calculating inheritance tax
Sammi knows that giving assets away in her lifetime can reduce the value of her estate for inheritance tax purposes. However, she wants to make sure that whatever she does will work for everyone, and will not have unwanted consequences for her or her children, either now or when she is no longer around.
As long as Sammi does not continue to benefit from any gift she makes, and provided she survives the giving of the gift by at least 7 years, the value of the gift will fall outside of her estate in relation to calculating inheritance tax.
Qualifying for business property relief
She has also been told that business property relief may apply to the value of her business and she’s eager to find out more.
Business property relief (“BPR”) is a valuable relief from inheritance tax that applies to qualifying businesses. A “qualifying business” is one that is run for commercial gain and is not an investment business that wholly or mainly deals in securities, stocks and shares, or land or buildings.
Although Sammi’s business involves dealing in land and buildings, because the company buys properties for development and re-sale for a profit, her business is not considered to be an “investment” business as the properties on the company books are effectively “stock in trade”. Having run the business through her private limited company for thirty years, Sammi easily meets the ownership criterion that she has held the shares for at least two years.
Whilst Sammi’s company shares would qualify for BRP in her estate, she is eager to ensure that Chris and Philippa can benefit now. She is, however, concerned with what would happen should she die within 7 years of gifting her shares to Chris and Philippa.
Her concern is valid, but as long as Chris and Philippa still have the shares when Sammi dies, and they have not sold the company or given the shares away, the shares will still qualify for BPR, and will not add to the inheritance tax due on her estate.
In addition, because her business assets are shares in her unquoted company, even if the business ceases to be a qualifying business, after she has given the shares away, BPR will still apply provided Chris and Philippa still hold the shares. She is even more relieved to know that because Chris has been talking about changing the direction of the company to retain some of the properties they develop as rental properties.
Gifting shares and capital gains tax
Whilst it makes sense for Sammi to give shares in her company to Chris and Philippa now, as the business has become more successful the value of her shares has grown. Because of this the shares now carry a large inherent gain.
For the purpose of calculating capital gains tax, giving assets away is treated as a disposal at market value. Sammi therefore wants to know that if she gives all, or most of her shares to Chris and Philippa, could she end up with a large capital gains tax bill, even allowing for Entrepreneur’s Relief.
Sammi’s shares are considered to be business assets in relation to capital gains tax, so Sammi can, with Chris and Philippa’s agreement, elect to hold the gain over into Chris and Philippa’s hands. This means that Chris and Philippa will be deemed to have acquired the shares Sammi gives them at their value on the day Sammi set up the company and Sammi will not be charged any capital gains tax on the disposal of her shares to Chris and Philippa.
Should Chris and Philippa decide to sell the company in the future, Sammi’s original acquisition value will be the value used to calculate any capital gains tax. Chris and Philippa would pay at that point. In Chris’ case, Sammi will need to wait until Chris has moved back to the UK from Italy before giving him his shares because a hold-over election can only be made where the gift of business property is made to a person who is UK resident.
Asset Protection & Prenuptial Agreements
How Philippa can ensure her inheritance is kept within her immediate family
Family Partner, Maria Mulroe, provides insight into how you can protect against claims
Philippa is correct to be concerned about any claims Chloe may have on the company in the future. Once Chris and Chloe are married, his shares in the family property development business would become matrimonial unless they can be fully ringfenced out. The fact that these shares are in a family business and are being gifted equally to siblings on their mother’s retirement is an important point. This type of asset can be ringfenced unless needs cannot be met from other matrimonial resources.
In addition, the date when the shares are gifted is also relevant because if over the course of a long marriage the value of the company increases, then a court is more likely to consider shares held by Chris as matrimonial.
In the event of a divorce the court can order the shares to be valued by an expert accountant. This would include a look at the liquidity of the business to see if funds could be taken out by Chris. To prevent an order for a transfer of shares to Chloe being made, would usually not be workable as a shareholders agreement need to be in place.
It is therefore important that as a shareholder Chris enters into a shareholders agreement, and has a prenuptial agreement in place to secure the family business above and beyond the simple ringfencing argument.
Is a shareholder agreement necessary?
Before transferring the shares, all shareholders should seek detailed advice on revising the articles of association of the company and prepare a detailed shareholders agreement. This will regulate how the shareholders deal with various issues relating to the company and could include how shares are to be valued if one of the shareholders wants to sell their shareholding, which would be relevant in the event of a divorce.
Chris and Chloe must have Pre-Nuptial Agreement in place, ideally before they marry, in which it can be made quite clear the position with the family business. Prepared correctly, their Pre-Nuptial Agreement should include their scheduled disclosure and signed certificates, from both their independent solicitors, confirming they have been fully advised on this.
Buying Property Through A Company & Multiple Dwelling Relief
What Chris and Chloe need to know before they make an offer
Property, Farms & Estates, Senior Associate, Kate Jackson explores what you need know about purchasing property through companies and the support available
First time buyers relief and stamp duty
If Chris and Chloe have never owned a residential dwelling or a share in a dwelling in the UK, or anywhere overseas, they can claim First Time Buyer’s (FTB) Relief on their purchase – providing that the purchase price of the property is less than £625,000.
Stamp Duty is not paid on the first £425,000 and paid at 5% between £425,000 – £625,000.
In order to claim FTB relief Chris and Chloe will have to intend to live in the property as their main home. If they are buying the property to rent then they will not be able to claim the relief. Being a shareholder in a company that owns many properties will not preclude them from claiming the relief. However, should they pay more than £625,000 for their first property then the normal stamp duty rates apply, and they will not be able to make a FTB relief claim.
How living abroad impacts UK stamp duty payments – The overseas surcharge
As Chris has been living abroad he will however have to pay the overseas surcharge. The surcharge applies to all “non resident transactions” even if you intend to live in the property, and regardless of whether or not you already own a residential property.
If a purchaser is not in the country for 183 days in the year before the completion date of their purchase then they are considered “non-UK resident” irrespective of their nationality or citizenship and the surcharge applies.
Please be aware that if you are buying jointly and one of you is “non-UK resident” then you are all treated as non-UK resident in relation to the transaction. If you are married or in a civil partnership and one of you is UK resident, then you are both considered a UK resident for the purposes of the transaction.
The surcharge is an extra 2% stamp duty. This will be paid by Chloe and Chris on completion of their purchase. However if they live in the UK for 183 days in the first year following completion of their purchase they will be eligible to claim back the surcharge. They must make the claim within 2 years of their purchase.
Stamp Duty Land Tax & Multiple Dwelling Relief
A company always pays the higher rate of stamp duty being the additional 3% of Stamp duty on a purchase above £40,000. If a company purchases a property for greater than £500,000 then a rate of stamp duty of 15% can apply subject to some reliefs.
However the company will be able to claim Multiple Dwelling Relief (MDR) if the four flats that the company is purchasing are linked transactions. The transactions will be considered linked if the seller and the buyer are treated the same for each transaction. For instance, if the flats are being purchased at the same development.
In this case the company is buying four flats at the same development so MDR will apply. The relief is calculated by adding up the total consideration paid for the four properties and then dividing by the number of properties. Stamp duty is also paid at a minimum of 1% on each quarter of the consideration.
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