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Saving Inheritance Tax and Transferring Company Shares into Trust

Saving Inheritance taxIf you hold shares in a private trading company, it is likely that they benefit from full relief against inheritance tax.   However, this is under threat from a tax-hungry Government. By transferring your shares into trust, you may protect current the full relief currently available. 

The immediate threat is the Government spending review on October 20. The current full relief from inheritance tax (IHT) could be lost from that date if nothing is done.
 
At the current time, to benefit from full relief from inheritance tax on your company shares:
  1. The company needs to be trading
  2. You need to have held the shares for 2 years
By transferring your shares into trust, you can retain the full relief from IHT even if legislation changes. The key is to have the shares in a trust before legislation changes.
 
What is a trust?
 
A trust is a way of holding assets on behalf of someone else.   If you have a bank account for a child or grandchild who is a minor, you hold the money in trust for that child.
 
What kind of trust?
 
Normally, you would use a discretionary trust, which is very flexible? This puts you in a position where you can influence the running of the trust during your lifetime. You do not need to give up control of the shares completely if you use a trust.
 
Who should be trustees? 
 
You would ideally choose trustees who you implicitly trust, and who understand something about the shares or about the company.
 
You may choose trustees who are family members. However, with a trust for company shares it is often more important for them to be able to take the right decisions on your behalf, than that they are a close relative. If they are both, that is fine.
 
Influence and Letters of wishes
 
The way you influence the decision-making by the trustees is by making a separate letter of wishes. Through this, you can influence the actions and decisions the trustees take. You can also amend the letter of wishes over time, while you are alive.
 
You can also keep shares in your name, and maintain control or influence through the shares you own. However, you will only preserve the full relief from IHT through the shares in the trust.
 
Receiving an income after creating the trust
 
You may lose your right to dividend income if you put all your shares into trust. However, it is possible to maintain an income in a different form through a service agreement.
 
Pitfalls
 
The dividends payable on the shares will be taxed at 42.5%.
In addition, the shares need to be retained in a trading company. If the shares stop being used in trading activities for more than a short period, they may lose their relief from IHT.
 
If the shares are turned into cash, then a small amount of IHT may be payable every 10 years, at 6%. But this is only paid on cash assets over the Nil Rate Band (or tax-free amount) of £325,000.
 
Summary
 
There is a real advantage of considering a trust for shares you hold in a private trading company. If you have shares worth £1 million, and the rate of relief from IHT soon drops to 50%, then the trust will have saved you £200,000.

Added Thursday 19th July