Ltd Company

Cameron1590_2

Hello,

We inherited a Ltd company which was our late fathers a few years ago. 

There was no inheritance tax to pay but the Ltd company had a bank balance of £40k. 

The accountants our father used wound the company up and we dealt with the distribution of the estate. 

At the end of the financial year, we filed self assessments to incorporate the dividend that had been paid from the Ltd company on winding up to the two of us. I seem to recall the accounts saying that we need to make sure we file a self assessment. 

A friend seems to think that we shouldn’t have paid any tax on the dividends as it was included in the inheritance tax returns. 

Is this correct? My understanding was that should, we were both 40% tax payers via PAYE at the time. 

Thanks 

pjs493

I don’t have an answer for you, but a call to the HMRC bereavement line should answer the question. 

I found them helpful following the death of my husband and they answered questions related to my own tax situation due to what I inherited. They set me up for self assessment so I can declare rental income from my late husband’s rental property. Both times I’ve had cause to call them there was little to no wait in hold and the staff seem highly trained and were extremely compassionate and understanding. I got quite upset during one phone call because grief overcame me in the moment and the lady who I was talking to was extremely kind and understanding. 

One thing that might be useful to know, but would be figured out via self assessment, is that tax on dividends is only 8.5% if you’re a basic rate tax payer. 

user1977

From a very cursory Google, I think it's the other way round and there's Inheritance Tax relief on the value of the shares (if there had been any IHT payable). 

Keep_pedalling

It sounds like you inherited the company and were then the new directors of that company, which was subsequently wound up, in which case these dividends need to be declared. The business would have been exempt from IHT.

Cameron1590_2

Keep_pedalling said:

It sounds like you inherited the company and were then the new directors of that company, which was subsequently wound up, in which case these dividends need to be declared. The business would have been exempt from IHT.

I probably didn’t explain this very well. That is correct, my father was the sole owner and shareholder. As the business was reliant on his skills, when he died the business was wound up. 

The accounts said at the time that we’d have to pay dividends they paid us (remainder of the funds held within the Ltd Company). 

I thought that would have been the case, but wanted to double check. 

I suspect my friend has got their wires crossed and are viewing this as if it were a personal savings account and not funds from a Ltd company. 

Thanks

Malthusian

The business is not necessarily exempt from IHT. That is only the case if it was trading and qualified for Business Relief. If it was a "cash shell" and did nothing except hold the £40k, it wouldn't be exempt.

The OP did say there was no IHT to pay, but we don't know whether that was due to Business Relief or the estate being under the nil rate band(s).

Cameron1590_2 said:

A friend seems to think that we shouldn’t have paid any tax on the dividends as it was included in the inheritance tax returns. 

Your friend does not know what they are talking about. 

If someone inherits a limited company and IHT is payable (no Business Relief and estate over nil rate bands), the estate has to pay Inheritance Tax and then they have to pay tax again (likely capital gains tax or dividend tax) to get the money out.

Similarly, if the deceased had taken the money out of the company whether they were still alive, they would pay CGT/dividend tax and then their estate would have paid IHT on the cash they took out.

There is no relief from "double taxation" here.

Keep_pedalling

As you said he died several years ago I rather assumed the the business was continued until recently.

poseidon1

Malthusian said:

The business is not necessarily exempt from IHT. That is only the case if it was trading and qualified for Business Relief. If it was a "cash shell" and did nothing except hold the £40k, it wouldn't be exempt.

The OP did say there was no IHT to pay, but we don't know whether that was due to Business Relief or the estate being under the nil rate band(s).

Cameron1590_2 said:

A friend seems to think that we shouldn’t have paid any tax on the dividends as it was included in the inheritance tax returns. 

Your friend does not know what they are talking about. 

If someone inherits a limited company and IHT is payable (no Business Relief and estate over nil rate bands), the estate has to pay Inheritance Tax and then they have to pay tax again (likely capital gains tax or dividend tax) to get the money out.

Similarly, if the deceased had taken the money out of the company whether they were still alive, they would pay CGT/dividend tax and then their estate would have paid IHT on the cash they took out.

There is no relief from "double taxation" here.

I echo your statements on this situation, Business Property relief only available  in respect of trading entities, and even then, in relation to trading companies there maybe 'passive investment assets' held within excluded from the relief.

Cameron1590_2

It looks like the accountants dealt with this correctly. I hadn’t doubted them until a friend started spouting off that the dividends should have been tax free. 

Thanks all for the help advice, greatly appreciated.