I’m 85: should I hand over shares in the family business to my sons now to save on tax?

Together with my two sons I am a senior partner in the family business. I am an 85 year old still working partner.

Do my sons have to pay inheritance tax on my death? Do I have to transfer my shares to them now?

I hate doing this if it’s not absolutely necessary because this poor old lady will feel superfluous!

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Heather Rogers replies: I can understand that you do not want to become superfluous and want to continue as long as possible!

Depending on the type of business you’re a partner in, there’s an exemption that might give you some peace of mind: it’s called business property relief, or BPR.

What is Company Property Exemption?

BPR is an inheritance tax exemption available on the value of certain business interests.

It can be passed down through a will or even while the owner is alive, and it covers:

1. A company or an interest in a company, for example a sole proprietorship or partnership;

2. Any number (however small) of shares (ordinary and preferred) in an unlisted trading company;

3. Shares with a controlling interest of more than 50 percent in listed trading companies;

4. Land and buildings or installations and machines used by the company, but privately owned by a partner in the company or a controlling shareholder.

The relevant corporate real estate may consist of buildings and assets owned by the company itself.

How much is the relief?

There are two levels of relief.

100 percent relief for:

– A company or interest in a company

– Shares in an unlisted company

50 percent exemption for:

– Stocks controlling more than 50 percent ownership in a publicly traded company I’ve made this consistent with the reference above – is this correct?

– Privately owned assets, including land and buildings, used by the company but privately owned by a partner or a controlling shareholder

– Land, buildings or machinery used in the business and held in a trust that the business is entitled to benefit from

What are the conditions?

To be eligible for BPR, two conditions must apply.

– An entrepreneur must have owned the ‘relevant company property’ for two years.

This may include the period prior to ownership if a deceased spouse has bequeathed to their surviving spouse in their will, so if the total period of ownership between them exceeds two years, exemption applies.

– The company must also be ‘acting’; this means that 51 percent of the company’s activities must come from a trade or profession.

If 51 percent of the company’s business comes from investments, the company does not qualify.

It’s an “all or nothing” rule: if 51 percent or more of the activity is trading, then the entire company qualifies, and if it’s the other way around, none qualifies.

The following types of companies are not eligible.

– Those whose income comes from securities, stocks or shares, land or buildings, or from making or holding investments (unless it has a trading side that accounts for more than 51 percent of the business).

– Non-profit organizations.

– Those who are sold, unless the sale is to a company that will continue the business and the estate of the deceased, will receive shares of that company as payment.

– Those that are liquidated, except to allow the continuation of the business in some form.

An item is not eligible for BPR in the following circumstances.

– It was not used for the company in the two years before it was passed on as a gift or as part of the will.

– It is not needed in the company in the future.

What about other inheritance tax exemptions?

If you operate a farm where “agricultural property deductions” are available, you cannot claim BPR.

However, you may be able to claim BPR on assets that are not covered by APR, such as equipment, buildings, and machinery.

How do you apply for a business property exemption?

When filing a claim for BPR as an executor of an estate, you should use the market value of the company or assets, especially those on which you are only eligible to claim 50 percent.

What about gifts during your lifetime?

An estate may still qualify for BPR if the assets were given away during the decedent’s lifetime, but they died within the seven-year period.

The same rules apply, but if someone gives away business property or assets, the recipient must keep it in business until the donor’s death if they want to keep the exemption.

However, they can replace the property or assets – such as machinery – with something of equivalent value if it is for use in the business.

However, the grantor must have owned the business or assets for at least two years prior to the grant date.

Is capital gains tax a problem?

If someone donates an asset during their lifetime, it is considered a taxable disposal of that asset.

If the assets have increased in value during the ownership period of the person giving them away, the gain is subject to capital gains tax.

However, if assets are retained until death and then transferred through the will, their value is “rebased” so that the beneficiaries of the deceased’s assets receive them at their current market value, tax-free.

That rebased value becomes their purchase price, if they later gift or sell them.

Sometimes waiting leave may apply to corporate asset donations made during a person’s lifetime.

This is where capital gains tax is not paid at the time of the gift, but held until the recipient sells the asset.

However, the rules for trading are stricter for company assets. The company’s business must be at least 80 percent manageable for CGT, versus 51 percent for estate tax.

Make your decision

I have provided the options for passing on your shares upon death and during your lifetime.

I don’t know your circumstances, but I’ll make the general point that from a tax point of view, it’s better if a share of the company passes on death, provided the company qualifies for a deduction.

I wrote about when it’s a good idea to hire an accountant here. One of the scenarios is that you have a business to sell or are retiring.

You may have a company accountant you can consult on this matter, but if you need a professional to give you personalized advice, the article linked above explains how to find someone with the right expertise.

Ask Heather Rogers a tax question

Tax expert Heather Rogers answers our readers’ questions

Heather Rogers, founder and owner of Aston Accountancy, is our tax columnist. She is ready to answer your questions on any tax topic – tax codes, estate tax, income tax, capital gains tax and much more.

If you would like to ask Heather a question about tax, please email her at taxquestions@thisismoney.co.uk.

Heather will do her best to answer your message in an upcoming monthly column, but she won’t be able to reply to everyone or correspond privately with readers. Nothing in her answers constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.

Please include a daytime phone number with your message – this will be kept confidential and will not be used for marketing purposes.

If Heather can’t answer your question, so can you read more about help with tax matters here, including resources for free professional advice if you are older and/or on a low income.

You can also get in touch MoneyHelper, a government-backed organization that provides free assistance to the public in financial matters. The number is 0800 011 3797.

Here, Heather shares tips on how to find a good accountant, including when to seek help, hiring the right type of company, and typical costs.