Inheritance tax: business relief, excepted assets and a gift with reservation
Geoffrey, aged 77 and widowed, owns 100% of Gable Engineering Ltd, an unquoted trading company. He has held the shares since 1995. The company is valued at £1.8m, but it holds £300,000 of surplus cash on deposit and a £200,000 investment portfolio, neither of which is used in the trade. Geoffrey also owns quoted shares worth £400,000, his home worth £800,000 and cash of £100,000. In June 2024 he plans to give £250,000 cash to his daughter. In December 2024 he plans to give 20% of his Gable shares to his son, while remaining managing director on the same salary. In 2026 he plans to give his home to his son and continue living there rent-free. Geoffrey has made no previous lifetime gifts. He asks whether these gifts will reduce his inheritance tax bill.
1. Advise on the availability of business relief for the Gable shares, including the effect of the excepted assets.
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Business relief is potentially 100% on unquoted shares in a trading company held for at least two years. Geoffrey has held the shares since 1995, so the holding period is met. But the company has excepted assets: £300,000 surplus cash and a £200,000 investment portfolio, total £500,000, which are not used in the trade. Relief is restricted to the trading proportion: (£1,800,000 - £500,000) / £1,800,000 = 72.22%. So only £1.3m of the £1.8m value attracts 100% BPR.
The 20% gift is worth £360,000 gross. BPR at 72.22% = £260,000, leaving £100,000 chargeable if Geoffrey dies within seven years. The remaining 80% held at death has BPR on £1.04m, leaving £400,000 chargeable.
2. Explain the inheritance tax effect of the cash gift and the house gift.
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The cash gift of £250,000 is a PET. If Geoffrey dies within seven years, it becomes chargeable and uses his nil-rate band first. The annual exemption of £3,000 could reduce it to £247,000, but I will ignore that for simplicity.
The house gift is the problem. If Geoffrey gives the home to his son in 2026 and continues to live there rent-free, it is a gift with reservation of benefit. The house remains in his estate for IHT, so the gift does not reduce the bill. To avoid the GROB, he must pay a full market rent and not have any other benefit, or move out. The rent would be taxable income for the son.
3. Calculate the approximate inheritance tax if Geoffrey dies in 2027, assuming the son retains all assets and the house remains a gift with reservation.
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Assume death in 2027, within three years of both gifts, so no taper relief. The estate before relief is £1.44m (80% shares) + £400,000 quoted + £800,000 house + £100,000 cash = £2.74m. RNRB is nil because the estate exceeds £2m. BPR on the 80% shareholding is 72.22% × £1.44m = £1.04m, leaving £400,000. The death estate after BPR is £400,000 + £400,000 + £800,000 + £100,000 = £1.7m.
Lifetime gifts: cash £250,000 and shares £100,000 after BPR = £350,000. The NRB is £325,000, so £25,000 is taxable at 40% = £10,000. The NRB is fully used, so the death estate has no NRB. Death tax = £1.7m × 40% = £680,000. Total IHT ≈ £690,000.
If the house gift had been effective (market rent paid), the house would be a PET and the estate would be smaller, but the RNRB position and the seven-year clock would need review.