Margaret - an estate that loses the residence nil rate band and a gift that may not pay
Margaret, aged 78, was widowed in 2018. Her husband left his entire estate to her, so both his nil rate band and his residence nil rate band are fully available. Her assets are: her home in Surrey worth £1,100,000 with no mortgage; a quoted share portfolio worth £700,000 which cost £250,000; a 30% shareholding in an unquoted family trading company valued at £3,000,000; and £150,000 of cash. She is in reasonable health, has two adult children and has never made a lifetime gift. Her accountant has suggested she 'give the quoted shares away now to save inheritance tax'. She has no intention of moving house, wants to maximise what her children receive, and is willing to consider charitable giving if it benefits them.
1. Quantify Margaret's inheritance tax liability if she died now with no further planning, and explain why her residence nil rate band is worth nothing. What would change if she left 10% of her estate to charity?
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Estate and reliefs
Total assets: £1,100,000 + £700,000 + £3,000,000 + £150,000 = £4,950,000.
Business property relief at 100% on the unquoted trading company shares (no minimum holding is needed for unquoted shares, and the two-year ownership test is met) removes £3,000,000, leaving a chargeable estate of £1,950,000.
Why the RNRB is lost
The £2,000,000 taper threshold is tested against the value of the estate before business relief and before exemptions. Her estate for this purpose is £4,950,000, so the RNRB is reduced by £1 for every £2 above the threshold - (£4,950,000 − £2,000,000) ÷ 2 = £1,475,000 - which wipes out the £175,000 RNRB entirely. Her husband's transferred RNRB is tapered in exactly the same way, so that is also nil. The business shares destroy the relief even though no tax is paid on them.
Tax
NRB £325,000 + 100% transferred £325,000 = £650,000. (£1,950,000 − £650,000) × 40% = £520,000.
Charity
The 36% rate needs a gift of at least 10% of the baseline amount - the estate after reliefs and after the nil rate band: £1,950,000 − £650,000 = £1,300,000, so at least £130,000. If she gives £130,000, the chargeable estate is £1,820,000 less £650,000 = £1,170,000 × 36% = £421,200. The charity receives £130,000 and the family pays £98,800 less tax, so the net cost to the children is only £31,200 - good value if she has charitable intentions anyway.
2. Margaret is considering giving the quoted share portfolio to her children now. Analyse the capital gains tax and inheritance tax consequences, including the position if she dies four years later.
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Capital gains tax now
A gift to connected persons is a disposal at market value. Gain: £700,000 − £250,000 = £450,000, less the £3,000 annual exempt amount = £447,000. As a higher-rate taxpayer (her income from the portfolio and her estate means the basic rate band is not the constraint here) the rate for disposals on or after 30 October 2024 is 24%, giving £107,280 payable by 31 January following the end of the tax year.
Gift relief is not available: it requires the shares to be in a trading company and the gift to be a chargeable transfer; a quoted investment portfolio qualifies for neither.
If she dies four years later
The PET fails. Taper relief of 40% applies (four to five years). The PET uses the nil rate band first: £700,000 − £650,000 = £50,000 × 40% = £20,000, reduced by 40% taper = £12,000 payable by the children.
The death estate is now £4,250,000; after business relief of £3,000,000 it is £1,250,000, but the nil rate band has been absorbed by the PET, and the RNRB is still lost (£4.25m is above £2m). Tax: £500,000.
Total: £512,000 of IHT plus £107,280 of CGT = £619,280, against £520,000 if she does nothing. She would be roughly £99,000 worse off, and she would also have thrown away the CGT-free uplift on death.
If she survives seven years the PET falls away and the NRB is restored: (£1,250,000 − £650,000) × 40% = £240,000, a £280,000 IHT saving, but the CGT of £107,280 has already been paid, so the net benefit is only about £172,720 - and only if she reaches 85.
3. Assess the business property relief risk on the 30% shareholding and recommend what should be reviewed before relying on it.
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The relief is 100% on unquoted shares in a trading company held for two years, and a 30% holding is enough - no minimum shareholding applies to unquoted shares. The value at stake is large: if relief were denied, the £3,000,000 would fall into the chargeable estate and the tax would rise by £1,200,000 (and would push the estate even further beyond the RNRB taper threshold).
Points to review
- Trading status. The company must be a trading company and its activities must be wholly or mainly trading. If it has built up an investment portfolio, surplus cash, or lets property, relief on the whole holding can be lost if trading falls below the 50% line.
- Excepted assets. Where the company holds assets not used for its trade (excess cash, loans to participators, surplus land), relief is restricted by the proportion of the company's value attributable to those excepted assets.
- Continuity of ownership. The two-year clock restarts on a fresh issue of shares; the replacement property rules can protect a holding where shares are exchanged.
- Minority position. A 30% stake gives little control over dividends, share issues or a sale; a shareholders' agreement matters practically, even though it does not affect the relief.
Action: obtain the latest balance sheet and management accounts, quantify surplus cash and non-trading assets, and consider extracting excess cash by dividend before any chargeable event. Confirm the trade has been carried on throughout the two years. Do not rely on the relief until the trading and excepted asset position has been documented.