Reduce your heirs inheritance tax bill taxes year on year by allocating shares in the company
The simplest formnula for reducing inheritance tax is to transfer shares in the company each year.
How does this all work out tax wise?
First of all, let us consider the loan made by Jack and Jill to the Company.
It is assumed each of them own half of the loan:
Year Loan Total Jack Jill children
2007 204900 102450 102450 0
2008 206900 100450 100450 6000
2009 208900 98450 98450 12000
2010 210900 96450 96450 18000
2011 212900 94450 94450 24000
2012 214900 92450 92450 30000
2013 216900 90450 90450 36000
2014 218900 88450 88450 42000
2015 220900 86450 86450 48000
2016 222900 84450 84450 54000
2017 224900 82450 82450 60000
2018 226900 80450 80450 66000
2019 228900 78450 78450 72000
2020 230900 76450 76450 78000
(Jack dies)
2020 230900 -. 114675 116225
2021 232900 -. 113675 119225
2022 234900 -. 112675 122225
2023 236900 -. 111675 125225
2024 238900 -. 110675 128225
2025 240900 -. 109675 131225
2026 242900 -. 108675 134225
2027 244900 -. 107675 137225
2028 246900 -. 106675 140225
2029 248900 -. 105675 143225
2030 250900 -. 104675 146225
(Jill dies) -. -. 250900
In this example, at the point of Jills death, all of the shares are owned by the heirs.
Secondly, consider the value of the Company and the shares.
We will assume (which can't be guaranteed) that the value of the Spanish property increases by approximately 5% per annum.
On these assumptions, the position year by year is:
Year Property value Loan Company value Value of Shares (P-L) Voting Non-voting
2007 200,000 204900 4,900 - Nil Not issued
2008 210,000 206900 3,100 239 2861
2009 220,000 208900 11,100 854 10246
2010 230,000 210900 19,100 1469 17631
2011 242000 212900 29100 2238 26862
2012 254000 214900 39100 3008 36092
2013 267000 216900 50100 3854 46246
2014 280000 218900 61100 4700 56400
2015 294000 220900 73100 5623 67477
2016 309000 222900 86100 6623 79477
2017 325000 224900 100100 7700 92400
2018 342000 226900 115100 8854 106246
2019 360000 228900 131100 10085 121015
2020 378000 230900 147100 11315 135785
Jack dies – his 50 shares on these figures are worth £5,657.50.
He has given 49 of them to his children + half of the loan owed to him.
Total passed to children for inheritance tax is £5,657.50 + £38,225 – half of £76,450 – totalling £43,882.50, well under the exempt limit of £300,000.
At this point, the children own shares worth £135,785 + £5,657.50 + £38,225 = £179,667.50
on which no tax is payable
2021 397000 232900 164100 12623 151477
2022 417000 234900 182100 14008 168092
2023 437000 236900 200100 15392 184708
2024 458000 238900 219100 16854 202246
2025 480000 240900 239100 18392 220708
2026 500000 242900 257100 19777 237323
2027 525000 244900 280100 21546 258554
2028 550000 246900 303100 23315 279785
2029 570000 248900 321100 24700 296400
2030 590000 250900 339100 26085 313015
Jill dies – her 51 shares on these figures are worth £13,303.50, given to her children + the loan owed to her of £104,675.
A total of £117,978.50 for inheritance tax purposes, again well under her exempt limit, which would be £556,117.50.
On these figures, Jill would still have just under £400,000 available to cover the value of any other assets she may have to pass to her children.
Ignoring any other assets, the children will have inherited from Jack and Jill £250,900 of loans and £339,1000 worth of shares, a total of £590,000 upon which no inheritance tax is payable.
"Should they decide to sell their shares, on the basis that the buyer had to replace their loan, the children would then receive repayment of £250,900 free of any tax"
There would be Capital Gains Tax on the sale of shares.
Although this calculation is complex and the Capital Gains Tax legislation is due to change from April 2008, their ‘gain’ would be £313,015 less their initial cost of £6,000 and the ‘deemed’ cost of the shares received from Jack and Jill (5657.50 + £26, 085), a total of £37742.50.
If the new legislation is as expected, the gain of £275,272.50 would attract a tax rate of 18%,
That makes a tax charge of £49,549.05,
That would be the total tax paid, leaving the children with some £514,365 after tax.
This represents a huge saving compared to the position described where the property is not owned through a company.
As stated, the annual 5% increase in value of the property is for illustration, and there is no guarantee that this would be achieved, it could be higher or lower.
More importantlyat no time during their lives, do Jack and Jill lose control of their company as they own the voting shares.
Conclusion
The detailed example given is intended as an indication of what benefits could be gained from choosing the company ownership method.
Individual circumstances and requirements differ.
What is undoubtedly the case, irrespective of circumstances, is that the Company ownership method provides enormous flexibility in estate tax planning and can be made to respond to changes in fortune and circumstance on a tailor made basis.
It avoids any problems with overseas tax on death, and is geared to an English based system which is familiar and understandable.
It also avoids any need to involve lawyers in any actual transfers of share ownership, although it is recommended that professional advisers are consulted to ensure there are no unforeseen consequences in transferring share ownership.
The formalities of share transfer in a company, compared to the formalities of property transfer, however, are very simple, Wincham takes care of everything for you