Have inter-spouse transfers of business property been a waste of time

The Issue

Last year the Government made the unpopular announcement that Business Property Relief (BPR) would be restricted so that an individual can only receive 100% BPR on the first £1m of value and then 50% thereafter. There was originally no ‘inheritance’ of this allowance from one spouse to the other on the first death, as there is for the inheritance tax (IHT) nil rate band. This led to tax planning whereby couples sought to ensure that between them they could ultimately secure £2m of BPR.

Example

Roger and Lynne are married, and Roger owns 60% of a construction company, with this 60% stake being worth £3m. Before the recent budget £3m of value would ultimately have been subject to IHT of £400,000 on Roger’s death (calculated as £1m at 0% and £2m at 20%) if Lynne were to die first. This is because Lynne would have no shares on which BPR could apply on her death. This led Roger to gift 50% of his shares (equating to a 30% holding) to Lynne. He did this in the knowledge that there would then be scope for Roger and Lynne’s estates to collectively benefit from £2m of BPR (at 100%) even if Lynne were to die first. If Lynne were to die first, her estate could benefit from £1m of BPR by ensuring that £1m of value goes into a trust for the kids. In that scenario, Roger’s estate would also later benefit from £1m of BPR. At first glance this means that (assuming no growth in value) total IHT on the shares would be £200,000, whoever dies first (£2m at 0% and £1m at 20%).

In the recent budget it was announced that in the above scenario, if Lynne were to die first, then Roger would inherit her £1m BPR allowance and so on his death there would be £2m of BPR relief available. We are now receiving questions about whether the planning has therefore now turned out to be a ‘waste of time’. The answer here will usually be no.

In the example above at first glance does not give the correct answer. Although £1m of value on the first death will relate to 20%% of the company (there will be no valuation discount because for these purposes both husband and wife property is considered together) a discount would be available for the 40% holding of the surviving spouse. If we assume that the valuation of the 60% holding is after a 10% discount, then this would imply a company valuation of £5.56m. If we were to assume a 30% minority discount for a 40% holding, then this would be £1.56m on second death which would give rise to only £112,000 of IHT.

WSM’s view

From above, you can hopefully see that it can be advantageous to give both spouses the opportunity to get BPR shares out of their estates on first death because then the surviving spouse’s estate may be able to benefit from increased valuation discounts. There are other compelling reasons for making the transfer that we have not even touched on above. The above examples assume that the £3m value remains static. In reality, once shares have been inherited from the first spouse to die, they may appreciate in value and by making a transfer on first death, all that appreciation will now be outside the parents’ estates. Share valuation discounts are a big area of IHT planning generally, and this is particularly relevant now that trading companies will often be within the scope of IHT.