Inheritance Tax, the implications for business transactions

A recent professional negligence case involving law firm Mills & Reeve has highlighted the importance of ensuring clients are fully advised on the tax consequences of their business transaction.

The case hinged on the tax implications of a management buy-out (MBO). Mr Swain sold his shares in the family trading company on 31 January 2007.  Unfortunately less than two weeks after the sale Mr Swain died following an investigation carried out before a planned heart procedure. Mills & Reeve were aware of the proposed procedure but failed to warn Mr Swain that if he delayed the sale until after his operation, if he did not survive the procedure, then rather than suffer Capital Gains Tax on the sale,  100% business property relief would have been available to allieviate any Inheritance Tax  for his estate.

Mr Swain’s family commenced a professional negligence claim against Mills & Reeve on the grounds that they negligently failed to advise on the potential inheritance tax implications of the transaction, and that if the correct advice had been given they would not have proceeded with the MBO until after Mr Swain’s heart procedure. In this instance the claim was actually dismissed the case on the grounds that Mills & Reeve’s knowledge of Mr Swain’s heart procedure did not give rise to any duty to advise Mr Swain and his family of the inheritance tax issues.

However, this case emphasises the need to consider all the tax implications of a business transaction and obtain good tax advice from your accountant or tax advisor. Certainly, the risk of death should be considered where there are known health issues. Where appropriate a Deed of Variation, which is a document that enables the beneficiaries of the deceased’s estate to alter the distribution of the estate, should be considered.  If a Deed of Variation is created within two years of the deceased’s death then the assets of the estate could be re-directed away from the beneficiary into a trust in order to avoid inheritance tax charges.

In addition it is very important to check partnership and shareholder agreements for any provisions relating to automatic sale on death, as this would also cause the loss of the business property relief and trigger adverse inheritance tax consequences. It will still be possible to ensure that assets or shares are sold, but this can be achieved without the adverse tax consequences.