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Limited company shares are liable to Inheritance Tax under certain circumstances. It depends on how much they are worth and whether or not particular conditions are satisfied. If you run your own company or hold shares in another business, it’s important to have a plan in place for these shares upon your retirement or if you pass away.
Below is a basic guide explaining when and how much Inheritance Tax is payable on company shares. Professional estate planning advice should be taken to minimise the tax burden on your beneficiaries, ensuring that your shares and other assets are passed on efficiently.
When is Inheritance Tax payable on company shares?
Inheritance Tax (IHT) applies to the estate of someone who has passed away. An ‘estate’ comprises property, money, and possessions – including shares in a company.
Typically, however, no such tax is payable if:
- the value of your estate is less than £325,000, or
- you leave all other assets above the £325,000 threshold to your spouse or civil partner, a charity, or a community amateur sports club
If your estate is worth more than £325,000, the liability for Inheritance Tax on your shares depends on several factors. Namely, whether they are held in a quoted (public) limited company or a private limited company.
If you own shares in a public limited company and your estate value exceeds the IHT threshold, the shares will be subject to Inheritance Tax. However, relief of 50% may be available if certain qualifying conditions are satisfied.
Shares in private limited companies generally qualify for Business Relief. This means that your beneficiaries may not have to pay any Inheritance Tax on the company shares they receive from you, even if your estate is worth more than £325,000.
What is the current rate of Inheritance Tax?
The standard rate of Inheritance Tax is currently 40%, but it is only charged on the part of the deceased’s estate that is above the threshold.
Shares that someone gives away while they are alive are liable to ‘taper relief’ after they pass away, depending on when the shares were gifted.
A reduced rate of 36% may apply to some assets if at least 10% of the estate’s net value is left to charity.
Business Relief on company shares
Business Relief (previously Business Property Relief) shelters certain types of company shares from Inheritance Tax. 100% tax relief is available on shares in a private limited company or a limited company that is listed on the Alternative Investment Market (AIM). 50% relief is available on shares controlling more than 50% of the voting rights in a public limited company.
To qualify for Business Relief, the shares must have been owned by the deceased person for at least two years before they passed away. Additionally, the company in which the shares are held must not:
- mainly deal with securities, stocks or shares, land or buildings, or in making or holding investments (i.e. it must be a trading company)
- be in the process of being sold, unless the sale is to a firm that will carry on the business, and the estate will be paid mainly in shares of that company
- be in the process of being wound up, unless this is part of a process to allow the continuation of the company’s business
Shares in buy-to-let properties are excluded from Business Relief, because they are viewed as a type of investment company.
The executor of your will or administrator of your estate will claim this relief by completing form IHT400 (Inheritance Tax account) and schedule IHT413 (Business or partnership interests and assets) when they’re valuing the estate.
Giving away shares while you are alive
If you give your shares to someone else whilst you are alive, Inheritance Tax liability may still arise after your death. This applies to shares listed on the London Stock Exchange and unlisted shares that you held for less than 2 years before your death.
If you pass away within 7 years of transferring the shares and they are liable to Inheritance Tax, the rate of tax payable after your death depends on when you gifted them.
The shares will be taxed at 40% if you gifted them in the 3 years before your death. However, if they were given 3 to 7 years before you passed away, they will be taxed on a sliding scale at the following rates:
- 32% if there are 3 to 4 years between gifted shares and death
- 24% if there are 4 to 5 years
- 16% if there are 5 to 6 years
- 8% if there are 6 to 7 years
This is known as ‘taper relief’ and it will only apply if the total value of the shares you gifted in the 7 years before your death exceeds the £325,000 tax-free threshold.
No IHT tax will be due if you survive for at least 7 years after gifting the shares, unless they are part of a trust. This ‘7-year rule’ can be advantageous if your shares do not qualify for Business Relief, but you would like to gift them to your children. One example would be shares a buy-to-let property business.
When you give away your shares, you may also have to pay Capital Gains Tax or Income Tax, if they have increased in value during the time that you have owned them.
Gifting company shares to your spouse or civil partner
There is no Inheritance Tax to pay on shares that you give to your spouse or civil partner, regardless of their value, provided that:
- they permanently reside in the UK
- you are legally married to each other or in a civil partnership
If they keep the shares until their death, Business Relief may apply to the shares when they pass away. However, if they sell them, this relief will be lost. Any money from the sale that is included in their estate will be liable to Inheritance Tax after their death.
Generally, any shares that you leave to charities will also be exempt from Inheritance Tax.
Who is responsible for paying Inheritance Tax to HMRC?
The person who deals with your estate (the executor of your will or administrator of your estate) will use funds from your estate to pay any Inheritance Tax due to HMRC. They will also deal with any reliefs that may be available when they are valuing your assets.
Normally, beneficiaries do not pay tax on anything they inherit from you, but they may be liable to related taxes, for example, if they receive rental income from a property that you left to them in your will.
You can contact the Inheritance Tax helpline if you have any general enquiries. However, for comprehensive, tailored advice on Inheritance Tax and estate planning, you should speak to a solicitor.
Thanks for reading
Inheritance tax is an extremely complex area requiring professional help and guidance. Passing on your company shares is no exception, but it is possible to avoid or minimise their future tax liability with careful consideration and professional estate planning advice.
If you have any questions about this post or other queries relating to limited company shares, please leave a comment below or get in touch with our team.