My client is a second generation operator of a large number of caravan and leisure parks, carried on through a corporate structure, of which he controls with his wife. Due to the implementation of the £2.5 million cap on 100% inheritance tax benefits, options for lifetime giving are now more urgent, and transferring to their four children was a priority.
The initial advice was to review the corporate to determine if it should qualify for business relief, and whether any capital gains tax would be due on a direct gift of shares to the children. This involved a review of the activities of the group, income streams, and capital employed, along with a valuation of the company and associated land. The conclusion was that the company should qualify for inheritance tax business relief, but there could be a capital gains tax charge on a direct gift to children.
Following this conclusion, the recommendation was to transfer shares into trust to defer any capital gains tax that might have otherwise arisen on a direct gift, claiming business relief for inheritance tax purposes and holdover relief for capital gains tax purposes. In the process, our client appointed a right to income in the trusts to the four children, and created a discretionary pot to enable income to be shared with further generations, saving overall income tax on dividends. Due to health concerns, additional advice was taken on the form of gifting, and with insurance for the potential tax exposures.
The amount of inheritance tax at stake in relation to this business could be significant, and would not be something that is easily affordable from the income streams generated — this may have forced the company to sell assets to enable the inheritance tax bills to be paid. The planning implemented will reduce the clients inheritance tax exposure significantly after three years time, with insurance in place to cover residual liabilities, while protecting the assets in a trust environment for the benefit of the family.
Given the reduced rate of inheritance tax in the trust environment, which is more easily affordable over time, we expect the trusts to be retained at least for seven years, or potentially much longer — but if the decision is made to wind up the trust, the family should be able to benefit from minority discounts on partial ownership of the trading company in future.