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bigduckontax
bigduckontax, Accountant
Category: Tax
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Hi there. At some point I stand to inherit half of a business

Customer Question

Hi there. At some point I stand to inherit half of a business that comprises 3 HMOs. The properties are currently valued at over £1m in total - considerably more than when they were purchased. Will I have to pay inheritance tax, plus income tax on the rental income - and if so, at what rate? I assume I wouldn't have to pay Capital Gains unless I sold my share of the business. I'd be very grateful for any advice!
Submitted: 3 years ago.
Category: Tax
Expert:  bigduckontax replied 3 years ago.
Hello, I'm Keith and happy to help you with your question.

There is no tax due from you on an inheritance. Once the inheritance starts to earn you money than the income becomes liable to Income Tax. The estate from which the inheritance comes is liable to Inheritance Tax (IT) and the HMOs will be assessed for IT purposes at current market value, there being no Capital Gains Tax (CGT) on death, but there is no liability to IT on recipients.

CGT would not rear it's ugly head until you disposed of your half of the business at some indeterminate, future date. Then it would be applied at 18% or 28% depending upon your income level on the gain made on sale over the current market value on inheritance. There is an annual exempt allowance of 10.9K, this tax year 11.1K next. For tax planning purposes trickling sales of HMOs over tax years might be advantageous.
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Customer: replied 3 years ago.

Thanks very much, Keith. Just one further question: what I'm really trying to find out is how much less than the current market value for my half of the business, I would stand to receive. (This will determine whether my parents keep or sell their 50% share.) Can you shed any light?

Expert:  bigduckontax replied 3 years ago.
To quote an appalling employee I once had 'Can't help you there, Sir!' It would all depend upon the proportion your parents chose to leave to you. It's their call, not yours. Between thee and me there are great dangers in a parental sell off. They might fritter away their share of the sale proceeds in round the world cruises and other such mutual frivolities. Not beneficial to your long term interests at all!
Customer: replied 3 years ago.

Yes indeed! I should have expressed my question better, though. I meant to ask if my parents should sell their share now - and take a big Capital Gains hit - or leave the share to me, in which case I'll take a big IT hit followed by a small income tax hit. I don't mind if they spend (some of!) the cash, just want to make sure our share doesn't all end up going in tax...

Expert:  bigduckontax replied 3 years ago.
Well Inheritance tax (IT) is a flat rate 40% tax on any surplus over 325K. Spouses can utilise deceased halves unused exempt amount giving a possible 650K exemption.

CGT is chargeable at 18% or 28% depending upon the income level of your parents at the date of disposal. It's wet towel and back of an envelope time to work out which option is the more beneficial to you.

Please, you don't get an IT hit, their estate does! I know to you it seems the same, but actually it isn't.
Customer: replied 3 years ago.

Thank you.

Expert:  bigduckontax replied 3 years ago.
Thank you for your support.

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