Sometimes life does not unfold as you may expect

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Published: 23 Jun 2015

A case study in tax planning in relation to shareholdings.

It is sound tax advice that where the business starts to become profitable, the business should be incorporated in order to reduce the tax bill.

Since the profits of the partnership in question were rising rapidly, the advice was taken and the partnership business was incorporated.

It was agreed that the business property remained in the joint ownership of the two partners, since, if anything happened to the company, the property would be protected. I pointed out that a 50/50 ownership of the company, would deny them business property relief for inheritance tax purposes.

This was accepted since they were each in their late 30’s and if and when they sold the business in their 60’s they may retain the property as an investment which would deny them business property relief anyway.

Unfortunately, in 2009, one of the two shareholders contracted a terminal illness and died at the age of 46. As a 50% shareholder, this meant that no business property relief could be obtained for inheritance tax purposes. Consequently the estate would be charged with about a further £25,000 of inheritance tax.

It seemed to me that the best way to avoid this tax charge was for the surviving shareholder to gift a minimum of 1 share to the other shareholder and for the latter to freely bequeath in his will that share to the surviving shareholder.

The loss of a loved one was distressing enough for friends and family, but at least the tax saving helped them in some way to come to terms with the bereavement.

So if advice is sought on tax planning in relation to shareholdings for this and similar situations, please call David Cane at Sundial Tax & Finance Ltd on 0845 177 0036 or 07749 080 806.