Tax Planning Case Study Terminal IllnessMake Text Bigger
This is a rather sad case study, but it is also a very real situation that anybody reading it could find themselves having to deal with at some point. I am sharing it to demonstrate how effective tax planning can be and to give people a ‘heads up’ as to what is achievable in this awful situation.
Mr X was told by Doctors he had up to six months to live, he was terminally ill and has since passed away. He used his last few months to ensure his family were set up for their future and this case study is an overview of how he achieved that.
At that time of prognosis Mr & Mrs X had joint net worth of £2,000,000 over and above their nil rate IHT allowances.
This was made up from their rental property business which was worth £2,000,000 (no mortgages).
If their rental property business had been incorporated it would have been easy for Mrs X to transfer her shares to Mr X without paying CGT and with only 0.5% Stamp Duty. On his death his shares could then pass to Mrs X as per his Will, free of IHT, and the share value would be re-based at the time of his death for future CGT purposes.
However, that was not the case because the rental property business was owned jointly as individuals.
What happened on this occasion was that ownership by way of joint tenancy was severed at HM Land Registry, leaving the ownership as tenants in common. Mrs X then transferred her share of the properties to Mr X whilst he was still alive in the form of a gift with no consideration and Form 17 was submitted to HMRC. There was no CGT on the transfer between spouses and no Stamp Duty fell due because the gift was without consideration.
On the death of Mr X the properties were then passed to Mrs X without IHT, because there isn’t any payable on inheritance from spouses. This raised the base value of the properties to their value at the date of death of Mr X.
Mrs X then transferred the properties into a Limited Company at full market value.
The consideration was £2,000,000 of loan to Mrs X.
There was no CGT to pay because there had been no capital gain on the properties from the date they were inherited.
The shareholders of the company were the children of Mr & Mrs X, meaning that any further capital appreciation accrues to the company as opposed to the estate of Mrs X.
Mrs X then gifted the benefit of the loan she made to the company to her children as a Potentially Exempt Transfer, which means the asset falls outside of the estate of Mrs X completely for IHT purposes providing she survives for at least seven years.
The company now pays just the 19% corporation tax rate on any future profits, including capital appreciation on the uplifted value of the properties when they are sold. Remember that the base value is the value of the properties at the point of the death of Mr X.
If the family needs to withdraw money from the company they have the following options:-
- Use profits retained within the company to make a tax free repayment of the loan made to the company by Mrs X. This money will go to the children but they can distribute it in any way they wish.
- Sell property within the company and use the net proceeds of sale to make a repayment of the loan made to the company by Mrs X, to be distributed as above
- Mortgage the properties and use the money raised to make a repayment of the loan made to the company by Mrs X, to be distributed as above
Summary of results
- Mr & Mrs X effectively resolved their IHT problem (subject to Mrs X surviving for seven years)
- Future capital appreciation will only be taxed at the corporation tax rate (currently 19%) on the uplift in value of the properties when they are sold, less their value at the time of incorporation. This is far better than the starting point, whereby personal CGT would be 28% of all capital appreciation since the properties were first purchased by Mr & Mrs X many years ago for and for significantly less than they are worth now.
- It will not be necessary for personal income tax to be paid on up to £2,000,000 withdrawn from the company if it is dealt with a repayment of loans made by Mrs X.
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