IHT and the 7 year rule

The UNUSED proportion of a spouse's nil rate band can be transferred to the surviving spouse after the first one dies.

If you were to die with all of your nil rate band unused (e.g. because your shares were transferred to your kids MORE than 7 years before you died, and so don't use up any of your nil rate band... and all the other assets you own were transferred to your spouse on death as rather than going to other people, which as an exempt transfer wouldn't use up any of your nil rate band either) then 100% of your nil rate band would be available to be transferred to your spouse on their later death. So then when your wife later passes away, she has all of her regular nil rate band at whatever £ amount that's worth in the year she dies, and she has 100% of an extra nil rate band on top. So altogether she would have 200% of the standard nil rate band available for that year.

E.g., spouse 1 dies with the full £325k of their £325k nil rate band, unused because of the circumstances above: 100% unused. Spouse 2 dies a decade later at which point the standard nil rate band happens to be £350k, and spouse 2's executors fill in a form to get 100% of an extra standard nil rate band on top (another £350k), so have £700k of nil rate band available in total.

However in the situation you describe:

Mr BBJ gives away £250k of shares to his kids tomorrow and then dies six years from that point. It's a 'potentially exempt transfer' as it will be exempted if he survives 7 years. But as he has failed to survive 7 years, that 'potentially exempt transfer' is not exempt ; it forms part of his estate on death as if it had never been given away. And because it wasn't an exempt transfer of assets to his spouse (i.e. it was a transfer to his kids instead), it will use up £250k of his nil rate band.

The rest of his assets could go to his wife on death, so no more of his nil rate band would be used up at the time of death. So only 250k of the (assume current rate of 325k) nil rate band was used up, and 75/325ths wasn't used up. So 23% of the nil rate band didn't get used.

When wife dies a decade later, she has her standard nil rate band that year (say the allowable nil rate band is £350k that year) and her executors can fill out a form to get a transfer of another 23% of a standard nil rate band on top (350k x about 23% = about 80k). So the wife's estate is assessed against a total (350+80) £430k nil rate band.

So in that particular situation, the wife ends up with a 430k nil rate band (as a result of the first spouse not surving 7 years after date of gift, and not having much nil rate band left over to transfer to her). Whereas if the gift had happened a full 7 years before first spouse's death, with nothing much else using up the first spouse's nil rate band, the wife could have received a much bigger proportion of the first spouse's nil rate band and had 700k total nil rate band available to deal with the settlement of her own estate.

So from the above it would make sense to gift the assets as soon as possible to give yourself the best chance of surviving 7 years and the share transfer not using up any of your nil rate band. Obviously there are practical implications of handing over the shares to your kids in terms of them being able to vote the shares however they want. Or restrictions on transfer depending on the nature of the private company and any existing shareholder agreements etc.

I hope I am posting to the correct forum.

The 'cutting tax' forum is generally better for tax questions. Aegis's comments about BPR are something that could be quite pertinent, depending on the nature of the company.