Inheritance Tax and the advantages of a limited company structure

Chris Frame

There are many advantages of owning investment property in a limited company structure and tax efficiencies are some of the most notable, particularly inheritance tax (IHT).

Inheritance tax is unavoidable, making effective estate planning a gift to the eventual beneficiaries. Today in the UK, inheritance tax is 40% of your estate value over and above GBP325,000. With regard to property, this is true whether the property is owned in a personal name or as part of a limited company- if the latter, your shares in the company will be subject to IHT if the value of those shares is above GBP325,000.

Shares offer significantly more flexibility. They can be transferred or gifted quickly and easily- often within 24 hours- allowing for property owners to start planning for inheritance early with a goal of reducing IHT in the future. Property owners can progressively transfer shares over time while maintaining an element of control and continuing to receive the financial benefits. Conversely, if you own a property in your personal name and you want to pass it on, the only practical option is to hand it over in its entirety.

An additional advantage of early IHT planning is that if someone gifts a property (or shares in a property) and survives for the next seven years, no tax will be due on that asset. Within seven years, there is a sliding scale of tax reduction.

Letโ€™s look at a common scenario. Many parents or grandparents may wish to pass on property to their children but are hesitant to hand over full control of such an asset to a young adult. This means they may hold on to the property until their older age, making it less likely they will survive beyond the seven-year threshold described above and leaving their beneficiaries with significant tax burdens.

These burdens can be significantly mitigated with the progressive transfer of shares over time. For example, the parents in the scenario above could give away 10% of the company every year. This means that they retain control in the asset over a longer period and their child is not able to make any decisions without their consent. Also, by giving away shares earlier in their lifetime, parents and grandparents are more likely to survive beyond the seven-year mark which will eventually reduce tax on any shares that are still part of their estate.  

Ultimately, when it comes to inheritance and estate planning, a limited company structure allows for the separation of economics from control. Property owners can efficiently manage the economics of their investment without entirely giving up control, allowing for increased confidence in a smooth transition of ownership in the future.

Chris Frame

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