Inheritance tax planning on the fly

[Flashback1966]

I am trying to help a family. The father ran a property portfolio. He has passed away from his illness.


The company have shares:

Limited Company A - 50% father 50% mother - multiple properties
Limited Company B - 50% son 50% parents - few properties
Limited Company C - 70% daughter 30% parents - few properties

Property X - owned jointly in personal names with the father and his sister.


There are other companies, but these for holding the Freeholds with other flat owners.

The family is in total breakdown due to the father passing away. They have to deal with a property business. The father was a competent businessman and took care of everything.

However, the father did not plans for IHT (if the worse did happen).

They found a simple will, which passes everything to the mother. Would there be IHT tax implications?

There does n't seem to be business relief for property companies......

However, if the mother passes away, then everything gets passed on equally to the kids. In which case, the IHT liability will be huge.

[Gordon999]

The threshold for paying iht starts if the estate is over £325,000 Usually assets passing to spouse are not taxed for iht.

https://www.gov.uk/inheritance-tax

The executor and spouse probably needs advice from a lawyer speciallising in wills and estates.

Executor probably needs to pay a chartered surveyor for giving lowest market valuation of the properties

Executor probably needs to ask the accountant to give a valuation ( for inheritance tax purposes) of father's interest in company A ( 50%) . Company B (25%) , Company C ( 15%) and property X ( 50%) .

[Neelix]

Serious advice needs to be sought now and for the future.

consider a deed of variation too to alter the distribution of the assets now …

[CourseLeader]

Hello Flashback1966, that is a very generous allocation of your time to this family, and I trust you know you've taken on liabilities here magnified by the lack of engagement from the family. Still, let's see if we can give you some safe boundaries.

The question is... will there be any IHT complications? Yes, as you know, on second death. In theory the kids could round on you for not presenting them with IHT saving techniques now. Typically, you are right no business relief... except maybe the property holding freeholds which is a qualifying trade for Gains Tax, will have to look it up for IHT. Check if any of them are farm properties or FHL.

Alternatives
1. Some of the assets get passed straight away to the kids, using a Deed of Variation (of the Will), so that the second estate is less and the IHT bill is less
2. The mother takes the whole estate and starts a routine of gifting during life
3. The son and the daughter get training on how to run their companies well, and if they do a good job then they slowly take over the running of Limited Company A drawing extra income by way of dividends / salaries / SIP. You then turn this into a family company and start transferring slowly shares with dividend and wind up rights. (I think we're the only firm running a course delivering this knowhow to one family at a time)

Analyses
Estate planning is about achieving the result intended for the wealth. IHT planning is about achieving the estate planning intention tax effectively. Tax planners and lawyers do the second, sometimes ignoring the first. You should start with the intention if you wish to honour the father.
Then you see who is competent to run a property company and who wants to do it better.
Then, as a family group, you let them work out how to preserve and grow the assets. In the meantime, you're in limbo, and at some point you may need to bring in a manager.
If at the end of a few months you are still in limbo, you then have to do (1) above. You will need a tax planner for this because the work is detailed (say, 5k to 10k in fees). Wait for the family to make a choice and there's a time limit on executing a Deed of Variation.

Without a doubt you need a formal letter stating what you can and cannot do and why they should not expect you to know about tax claims and legal matters (unless you are qualified in these), and asking whether they really do want you to keep advising and if so which other professionals you should liaise with. Above all, make sure they all know they're going to be fine, but like a farm, wealth needs careful management and there are obligations that come with the wealth, for themselves and future generations.

[JamesHopeful]

The family certainly needs some professional assistance -- at the very least the services of a solicitor who specialises in probate -- which I assume they are getting?

However, to give an amateur answer to the questions in case it helps at all:

Property X - owned jointly in personal names with the father and his sister.

As joint tenants or tenants in common? If the former, the sister gets it under the jus accrescendi, if the latter, the wife gets it under the terms of the will.

They found a simple will, which passes everything to the mother. Would there be IHT tax implications?

I assume that there are no concerns as to the will's validity? (No reason why there should be.)

No IHT between spouses so I can't see why there'd be an IHT issue there.

However, if the mother passes away, then everything gets passed on equally to the kids. In which case, the IHT liability will be huge.

Yes that's where IHT might come in, although the net wealth being inherited by the kids would need to exceed the IHT threshold (which, depending on the circumstances, could be as high as £1m). It sounds like this may well be exceeded here however given the number of properties involved. The most obvious way to avoid IHT on the mother's estate would be for her to give the wealth away without reserving any benefit (such as being allowed to live in a house she's signed over to her children) and then make sure she lives for another seven years.