Many business owners understandably concentrate on the day-to-day running of their business and its medium-term strategy and do not give a great deal of thought to what happens after their death or how to maximise the value of their business for the families that they leave behind.
If you own your own business it is worth taking time to think about this. Taking the right action now can make a significant difference to your family and the tax that might otherwise be payable to HMRC on your death.
Business Relief: too valuable to ignore
Most business people will be aware that, at present, there are valuable reliefs from inheritance tax (IHT) available for business assets. Broadly an interest in a business, unquoted shares or quoted shares which gives their owner control of the business will qualify for 100% relief from IHT whilst land, buildings, plant and machinery used wholly or mainly for the purpose of the owner’s business will qualify for 50% relief.
In both cases the business must be a trading one (rather than an investment company) and the business assets need to be owned for a minimum of two years prior to the transfer giving rise to the IHT charge.
These are valuable reliefs and it is essential to ensure that the business is structured in such a way as to maximise them.
Care should always be taken when setting up the company that its documents of incorporation are drafted to maximise reliefs and to facilitate future IHT planning.
Vigilance is also needed on an ongoing basis to ensure that the company does not fall into some of the traps that lurk within the relevant legislation for the unwary.
Planning for maximising value post-death
If you own your own business, you should give some thought to what happens in the longer term and how to ensure that the maximum value is passed onto your family. The most important tool to achieve this objective is a well drafted, tax efficient Will, a document that should be regarded as essential for anyone with business assets.
The first point to bear in mind when structuring a Will is that as business assets should qualify for 100% relief from IHT, a gift of these to a surviving spouse or registered civil partner is a waste of that relief as these gifts are exempt in any case.
The preferable course of action is to leave the business assets to a discretionary trust. No IHT will be payable on your death before your spouse, because of the availability of spouse relief and Business Relief. The shares or business assets are held outside of your surviving spouse’s estate, which could be very advantageous should the law change to make the relief less generous by the time of the second death or if relief is no longer available because the business has been sold by that point.
For example, Derek dies leaving his company shares, which are worth £300,000, to a discretionary Will trust and the rest of his estate to his wife, Carol. Carol can still receive dividend income from the shares at the trustees’ discretion. The business is sold 3 years after Derek’s death and Carol dies 5 years later. The cash proceeds of the shares are outside of Carol’s estate in the trust and do not suffer IHT in Carol’s estate, saving IHT of up to £120,000 on current rates.
A double dose of relief
If it is intended that a business should remain trading indefinitely, perhaps because the second generation intend to carry it on, then it is possible, with planning, to achieve a double helping of Business Relief, minimising IHT significantly and perhaps adding to the future viability of the business.
This can be achieved by the surviving spouse buying the shares left to the discretionary trust.
So in the example above, following Derek’s death, Carol continues running the business with their son Andrew. Carol buys the company shares from the trustees of Derek’s discretionary will trust for £300,000. On Carol’s death she owns the shares, which are 100% relieved from IHT and the money that she has paid for them sits outside of her estate in the discretionary trust. Effectively £600,000 worth of assets are outside of the IHT net, with relief claimed on both Derek and Carol’s death. This gives an IHT saving of up to £240,000 on current rates, a significant sum of money.
If you would like more advice on how to structure your business or your personal affairs to ensure that you benefit from Business Relief and minimise the amount of IHT payable, please contact: