Juanita has contacted you following the death of her husband, Don. As the executor of his estate, she is seeking advice regarding the inheritance tax liability arising as a result of his death on shares which he owned. She also requires advice on the timing of her ceasing to trade.
Don:
– Died on 1 July 2016.
– Had always been UK resident and domiciled.
– Was married to Juanita, and they have one daughter, Lexi.
Lifetime gifts:
– Don made only two lifetime gifts.
– On 9 May 2011, Don gifted his overseas villa to Lexi.
– The villa was valued at £355,000 on 9 May 2011, and at £370,000 on 1 July 2016.
– On 1 March 2013, on the advice of a financial adviser, Don gifted 3,500 of his shares in Estar Ltd to Lexi.
– Prior to receiving this advice, Don had been planning to leave these shares to Lexi on his death.
– Under the terms of Don’s will, Don’s cousin will inherit the remaining 3,500 shares in Estar Ltd owned by Don at his death.
Estar Ltd:
– Is an investment company; no business property relief is available on the transfer of its shares.
– Before the gift on 1 March 2013, Don owned 7,000 ordinary shares in Estar Ltd.
– The remaining 3,000 ordinary shares issued by Estar Ltd are held by Juanita.
– The shares were valued as follows:
Percentage shareholding Value per share
1 March 2013 1 July 2016
0%–50% £9·00 £10·80
51%–75% £15·00 £18·00
76%–100% £20·00 £24·00
Juanita:
– Has carried on a business as a sole trader for many years, preparing accounts to 30 June annually.
– Following Don’s death, intends to cease trading and retire.
– Would like to cease trading on 28 February 2017, in which case the business will be sold to an unconnected person.
– Is willing to continue to trade until 30 April 2017, when Lexi will be able to take over the business.
– Does not anticipate having any other source of taxable income in either of the tax years 2016/17 or 2017/18.
Juanita’s business:
– Has taxable trading profits of £51,000 for the year ended 30 June 2016.
– Has budgeted tax-adjusted profits of £48,000 (before capital allowances) in the period ending 28 February 2017.
– Has budgeted further taxable profits of £4,000 per month if Juanita continues to trade after 28 February 2017.
– Has overlap profits from commencement of £17,000.
– The tax written down value on the main pool was £nil at 1 July 2016.
– The market value of the assets in the main pool will be £6,000 at the date of cessation.
Required:
Advise Juanita of the reduction in the inheritance tax liability arising on Don’s death in respect of the shares in Estar Ltd as a result of Lexi having received her shares as a lifetime gift, rather than on Don’s death.
Inheritance tax (IHT) liability on the Estar Ltd shares
Regardless of whether the shares in Estar Ltd were gifted to Lexi in Don’s lifetime or on his death, IHT will be payable at the rate of 40% because the gift of the villa in 2011 has used the full nil rate band.
However, whether the shares were gifted or not will impact on their value in Don’s death estate under the related property valuation rules.
The IHT due in respect of the Estar Ltd shares on Don’s death as a result of his making the lifetime gift to Lexi is £52,240 (£27,040 + £25,200) (W).
If all the shares had been retained by Don until his death, the IHT payable in respect of the shares would have been £67,200 (7,000 x £24 x 40%).
Therefore there is a reduction in the IHT liability on the Estar Ltd shares of £14,960 (£67,200 – £52,240).
(W) Value of the lifetime gift of 3,500 shares:
Related property rules apply as the shares in Estar Ltd were held by both Don and Juanita at the date of the gift.
Advise Juanita, by reference to the increase in her trading income after tax and national insurance contributions, whether it would be beneficial for her to continue to trade until 30 April 2017, rather than ceasing to trade on 28 February 2017. You should assume any elections which are beneficial to Juanita are made and should support your advice with a brief explanation of the available capital allowances in each case.
Note: Where necessary, you should assume that there are four weeks in each month of the years 2016 and 2017.
Cessation of trade on 28 February 2017
The profits of the year ended 30 June 2016 of £51,000 will be taxed in the tax year 2016/17.
If Juanita ceases to trade on 28 February 2017, the profits of her final accounting period will also be taxed in this tax year.
The tax liability in respect of the profits of the final accounting period will therefore be as follows:
