Directors' loans and Inheritance Tax

May 2006

You are probably aware that shares in your family trading company qualify for business property relief, this is presently a 100% relief, providing the correct criteria apply.

Accordingly, when you transfer the shares, no inheritance tax should be payable.

However a problem can arise if you die with a substantial amount owing to you on a directors' loan account.

The amount of such loans will form part of your estate for inheritance tax purposes. If your estate exceeds the nil-rate band (presently £285,000) the directors' loan will create a tax charge of 40% of the loan balance.

Potentially, the company may have to provide funds to cover this liability.

A solution may be to look at loans of a semi-permanent nature, and consider issuing shares to cover them - this may remove the inheritance tax liability, as you should be able to claim additional business property relief.

As always individual circumstances vary but do consider any outstanding directors' loans when you review your estate planning options.