Inheritance tax (IHT) is often viewed as a financial burden; however, in certain situations, it can provide strategic advantages, particularly when a company repurchases its shares. For family-run businesses, this can be a tax-efficient opportunity that turns a challenge into an advantage.
Understanding Share Buybacks and Inheritance Tax (IHT)
When a shareholder passes away, their shares form part of their estate and may be subject to inheritance tax at a rate of 40% above the nil-rate band. However, if the company chooses to buy back the deceased’s shares from the estate, the payment can be made tax-free if certain conditions are met. Surprisingly, this IHT event can provide the legal structure needed to facilitate an efficient and beneficial share redistribution.
This becomes particularly useful when the remaining shareholders don’t want an external buyer stepping in. Instead, the business retains control while the estate gains liquidity, funded by the company’s retained earnings.
Strategic Benefits of Inheritance Tax (IHT) in Share Buybacks
In scenarios where a family business has a single shareholder and that shareholder dies, the surviving shareholders may not wish to bring in external parties to manage the business. The company can buy back the deceased’s shares, which not only provides the estate with a clean exit but also avoids capital gains tax or income tax, assuming the buyback qualifies under HMRC rules.
Furthermore, inheritance tax (IHT) can establish a clean market value for the shares, thereby setting a fair price for the transaction. This can prevent valuation disputes and offer peace of mind to the family and company directors.
For tailored tax planning around such events, consider our expert Tax Advisory Services.
Real-World Implications for Business Owners
Let’s say the deceased owned 40% of the company. Suppose the shares are valued, and IHT is paid. In that case, the company can then purchase those shares from the estate, offering immediate liquidity and ensuring that remaining control remains with existing stakeholders. This can be especially useful in closely held family businesses.
This is an excellent opportunity to explore whether creating a Family Investment Company structure could be beneficial for your long-term succession and inheritance planning. By doing so, you can strategically address the transfer of wealth and assets within your family, ensuring a smoother transition and clarity in your estate management for future generations.
Learn More About Reliefs and Tax Strategy
For those interested in exploring more about Business Property Relief and strategic IHT planning, expert guidance is essential. At Care Accountancy, we help you identify and leverage tax-saving opportunities when dealing with company shares and inheritance.
You can also visit the UK Government’s guide on Business Property Relief for official eligibility rules and examples.
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