Investment in shares in an unquoted trading company including AIM shares are exempt from Inheritance Tax, after a two year holding period. This is attractive but taxpayers should also be looking at other investments closer to home that can save them substantial Inheritance Tax.
There are Inheritance Tax planning opportunities associated with investing in one of your children’s companies.
EXAMPLE
Edwina is thinking of gifting some cash to her son as this will save Inheritance Tax, as long as she survives seven years from the date of the gift. This will also reduce the amount of Inheritance Tax due over the seven years that she survives.
However, Edwina worries that she will not have any cash and that her son will waste her money on excessive purchases.
SOLUTION
Instead of gifting cash to her son, she should invest her cash as preference shares in her son’s trading company. Through this way, she will be able to redeem her shares if she’s unsure about her investment and get her money back.
INHERITANCE TAX SAVING
If Edwina survives two years from the date of purchasing the shares and her son ultimately ends up inheriting the shares, they will not be subject to Inheritance Tax. If she redeems the shares before her death then no Inheritance Tax will be saved but she will have the cash back with interest !
RISK
Edwina is still worried that the company might become insolvent and fail but this is a commercial risk that she should take. She did say that her son might only waste the money anyway !
Investment in children’s companies can be a beneficial proposition in the right family circumstances. The investor’s survival only has to be two years rather than seven in order to save Inheritance Tax and there is an opportunity to recoup the investment.