Inheritance tax law – the struggles of the Samsung chairman
This article is written by Paul Fairbairn and Victoria Symons, Partners at Cripps Pemberton Greenish
The family of late Samsung Electronics chairman Lee Kun-hee recently made headlines after his estate was told they will have to pay more than 12 trillion won ($10.78 billion) in duties inheritance, a record amount.
South Korea has one of the highest inheritance tax rates in the world, at 50% of the value of the estate (with a potential premium on top if the deceased held a majority stake in a company). The tax bill would be funded by a mix of donations and the sale of family assets, including works of art by Monet, Dali and Picasso (to name a few), but is also likely to require the sale of part of the Lee family interest. at Samsung.
Although the UK inheritance tax regime is not as punishing, with a ‘mere’ inheritance tax rate of 40%, it is not hard to imagine how a wealthy family could find themselves in a similar situation if they had not taken the necessary steps to plan ahead.
Our inheritance tax rate may be unattractive, but the regime can be lenient.
If the family business is a commercial business, Business Property Relief may very well apply and reduce the value (for tax purposes) of the business and other assets used in the business by up to 100%. The reasoning being that companies that reinject into the economy should not be sold or broken up to pay a single tax bill. Relief isn’t simple and it’s easy to inadvertently fall off the diet. It is therefore essential to take stock of the company and the application of this relief before testing it. Unfortunately for Mr Kun-hee’s family, even if he had been subject to UK inheritance tax the relief would not have applied as only a controlling interest in a listed company is eligible.
Ensuring the succession of a family business through generations is not limited to the tax situation of inheritances. If the business is to survive, engaging with the next generation is essential and this inevitably involves giving them a stake in the business. It turns out that giving them a stake is also good tax planning, assuming you survive seven years. You can also adapt the rights attached to their participation, for example by linking the value of this participation to the future growth of the company, thus reducing taxes and inciting to develop the company in one.
Passing on value to the next generation doesn’t automatically mean handing over control, at least not until you’re ready. Family business incorporations can, and should, have a built-in framework for succession. A crucial part of this is managing the tax, not only minimizing it, but also ensuring that it can be paid when the time comes.
Pay the tax
Few people can rely on donations to fund tax bills, so it’s essential to ensure there are enough assets in the estate, ideally outside the business, that can be liquidated in if needed. If the owners of the business are not too old, insurance may be the best way to manage this and ensure that the specter of taxation does not distract everyone from running the business and enjoyment of its benefits.
Relying on the sale of business assets such as shares can be difficult – with listed companies, the impact on the market could be volatile and lead to a decline in shareholder value. In contrast, shares of private companies are rarely freely transferable; most are subject to pre-emptive rights or an outright ban on selling other than at the discretion of the board of directors or other shareholders. Negotiating a path through this process can be expensive and time consuming.
For entrepreneurial families, the boundary between “family” assets and “professional” assets can often become blurred; if the family owns all the shares of a company, it is tempting to think of them all as coming from one “pot”. The taxman, however, would disagree with your accountant. Extracting assets from a business will almost always have tax implications. Dividends are subject to income tax and the availability of distributable profits. If distributable profits are insufficient, the sale of the company’s assets may attract corporation tax and other dividends as the proceeds are stripped. And that’s all without regard to creditworthiness or the best interests of the company itself.
Again the scheme can help because even if Business Relief does not apply, or at least not to the full value, tax can be paid in instalments to ensure that tax can be paid on the profits of dividends over ten years.
The fact that Lee Kun-hee was in a coma for the 6 years before his death meant that planning ahead wasn’t really an option, but it’s a tragic reminder that for a business, it’s always smart to plan ahead. consider this inevitable problem sooner rather than later.