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Can your business afford to pay millions in inheritance tax?
The changes to the UK’s inheritance tax regulations proposed in the recent Autumn Statement could greatly impact family business owners who had planned to pass their companies onto their children, and result in hundreds of thousands and even millions of pounds of additional tax charges.
How much tax would your children have to pay?
The value of any business assets over £1m in value will be liable to an effective 20% inheritance tax (40% rate but 50% relief). However, for most heirs their only way of being able to pay this tax will be to take a dividend from the business, which itself will be subject to up to a 39.95% tax. This means the “true” total inheritance tax rate will be much higher. For example:
- A business worth £1m will be liable for £0 IHT. No dividend required
- A business worth £2m will be liable for £200k IHT. This would require a £300k dividend to pay
- A business worth £5m will be liable for £800k IHT. This would require a £1.3m dividend to pay
- A business worth £10m will be liable for £1.8m IHT. This would require a £2.95m dividend to pay
How does this "double" tax work?
Using the example of a £2m family business passed onto one child, where previously the heir would not have to pay any tax. Under the new proposed rules though the true tax bill would be £300k+. The first million qualifies for 100% rate of relief, meaning there is no tax due. The second million qualifies for 50% relief, with the remainder taxed at a rate of 40%, resulting in a liability of £200k. However, if a dividend was required to pay this bill, the heir would need to take out over £300k from the business to be left with £200k net after the dividend tax of £100k.
Can I gift my shares now to avoid paying the new tax?
Any lifetime gifts of shares made on or after 30 October 2024, where the donor then dies within 7 years will be a failed transfer and be subject to the new taxes.