29 Dec Cash Rich Companies
BPR trouble for cash rich companies
If you’ve built up your company over the years, the last thing you want is for HMRC to tear it down to get its hands on the loot after you’ve gone. The good news is there’s a special inheritance tax relief to stop this happening: business property relief (BPR). However, the rules can be tricky and manage to catch company owners out on a regular basis.
All, half or nothing?
Where BPR applies to shares you own in a trading company they can escape IHT completely. And where you personally own assets used in a company’s trade, for example the business premises, BPR can cut the IHT bill on these by 50%. However, assets held in the company’s name, but not used for the trade, don’t qualify for any BPR. And this is where the trouble starts for many director shareholders.
Cash is not king
The saying that “cash is king” certainly doesn’t apply when it comes to BPR. Money sitting in a director’s loan account won’t qualify. So when it comes to working out the IHT on your estate, any cash in your company can mean BPR won’t apply to the full value of your shares.
Example. Bill and Ben are the shareholders of Acom Ltd. Over the years they had clocked up credits to their directors’ loan accounts totalling £200,000. Unfortunately, Bill suffered ill health and recently died. The net value of the company at the time was £1 million, but this included cash of well over £200,000 which had been in the bank for some years. Bill and Ben’s shares were valued at £500,000 each. BPR is scaled down by 20% to reflect the non-trading asset in the company, i.e. the cash. The result is that Bill’s estate is hit with £40,000 additional IHT (£100,000 x 40%).
Bill’s solicitor could have argued that the money in the directors’ loan accounts was working capital needed for the trade, but that would have been a non-starter as the money had been sitting around doing nothing for several years. Was there anything else that could have been done to boost the BPR?
Tip. When they realised Bill’s health was failing they could have converted the loan account balances into more Acom shares. This gets around the cash problem because ordinary share capital in a company qualifies for BPR. But they would have needed to do this in a certain way to work.
Trap. Shares in a company can only qualify for BPR where you have owned them for two years. So a deathbed purchase by Bill wouldn’t have got him BPR. However, there was an easy solution.
Tip. Instead of subscribing for new shares in Acom Bill and Ben could have made a “rights issue” against their existing shares. This is a simple procedure which can be done by resolution and the completion of a Companies House form. The neat trick is that the rights issue counts as an extension to their existing shareholding, not new shares. As they owned these for well over two years the new rights issued shares would have qualified for BPR immediately and saved Bill’s estate £40,000 in IHT.