A ques­tion of trust to pro­tect your shares from in­her­i­tance tax

Yorkshire Post - Property - - PROPERTY - Ben Lowe Ben Lowe is Trusts and Pro­bate Man­ager at Ford & War­ren So­lic­i­tors in Leeds.

IF you hold shares in a prop­erty com­pany, it is pos­si­ble that the shares 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 the full re­lief cur­rently avail­able.

The im­me­di­ate threat is the next Govern­ment Bud­get. 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 two 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. Prop­erty devel­op­ment com­pa­nies If you have shares in a com­pany that owns prop­er­ties sim­ply to draw rental in­come, this is not a trad­ing com­pany and there is no IHT re­lief.

How­ever, if the ma­jor­ity of the com­pany is en­gaged in build­ing and de­vel­op­ing prop­er­ties, or other trad­ing ac­tiv­i­ties, then re­liefs against IHT will nor­mally be avail­able.

A ma­jor­ity means a greater share of the net as­set value, and profit be­ing in ex­cess of rental in­come. If you are in­volved in trad­ing ac­tiv­i­ties as well as prop­erty in­vest­ment, it is pos­si­ble to ar­range your af­fairs to max­imise the tax re­liefs avail­able. This is not the sub­ject of this ar­ti­cle, how­ever. 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 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. 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. 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. 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 per cent. 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 six per cent. 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 £1m, and the rate of re­lief from IHT soon drops to 50 per cent, then the trust will have saved you £200,000.

How­ever, there are ad­van­tages and dis­ad­van­tages, and you need to know more about the pit­falls be­fore you fol­low this route. There is also the ques­tion of the cost.

CON­STRUC­TIVE AD­VICE: Shares in com­pa­nies in­volved in build­ing and de­vel­op­ing should qual­ify for In­her­i­tance Tax re­lief.

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