Save 100% inheritance tax on commercial property investments in your limited company

Dec 03, 2020

Tony Byrne, managing director of Wealth & Tax Management.

Wealth management expert Tony Byrne explains.

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DO YOU run a successful company which owns one, if not several, commercial properties? If so you risk HM Revenue & Customs treating your company as an investment company rather than as a trading company when you die.

“Why does this matter?” I hear you say. It does, because the shares of a trading company which have been owned by you for at least two years usually qualify for 100% business relief against Inheritance Tax on your death. In other words, when you die the value of your shares is normally free of taxation.

However, if you have a significant amount of money invested in your company in, say, bank deposit accounts and/or commercial properties which are not part of your trading business, HMRC could reclassify your company as an investment company on your death. This would mean that you would be denied 100% business relief and you would become liable to Inheritance Tax on the valuation of your shares from the date of your death.

Clearly, this is an undesirable outcome for most business owners. So what can you do about it?

One option is to sell the properties and distribute the surplus cash to the shareholders, probably as dividends, but this would defeat the object as the company would pay Corporation Tax on the capital gains on the sale of the properties at a rate of 19% and the money distributed to shareholders as dividends would become subject to Income Tax at rates of up to 38.1%.

If instead you were to invest the company’s spare cash into properties that are intrinsic to the trade of the business then it is highly likely such properties would become exempt from Inheritance Tax on your death because their valuations would be included in the valuation of the trading business.

For example, if you ran a care home, a pub, a restaurant, a hotel or a serviced apartments company, the commercial property your company owned would qualify for 100% business relief because it is essential to the running of the business.

For advice on how to save 100% Inheritance Tax on commercial property investments in your limited company, join us for a one-hour Discovery Meeting either at our offices or by video conference call at our expense worth £270 to each of the first three readers who contact us before December 31 2020. You know it makes sense. We offer a great cup of coffee too.

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