Is the value of my business liable for Inheritance tax?
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This depends on the types of business you have. If the business is simply a trading business as are99% of all businesses and the shares are not publicly traded then Business Relief od 100% would apply on the death of a shareholder. i.e. no inheritance tax is payable. However be careful as the value would still be in your estate for probate purposes which if added to your personal assets the value exceeds£2 million you could lose some or all of your residential nil rate band allowance.
If however the business is mainly an investment company (for example - a company which owns mainly rental properties) then Business relief would not apply and the whole value of the shares would be liable for inheritance tax.
If your company is both trading and holds investments the “ wholly and exclusively” rule would apply which is complex. Get advice and consider holding the investments separate from the trading company. This might be a good idea to protect the assets anyway.
Is your business liable for UK Inheritance Tax? Well in 99% of cases, that's not going to be the case because most businesses are trading businesses and are exempt from Inheritance Tax. So, if you buy and sell things, if you provide a service for a profit, that is a trading business, and therefore not liable to Inheritance Tax.
However, it's not quite as straightforward as that. If on your death, the value of your business, together with all of your other assets exceed more than £2million, you start to lose the residential Nil Rate Band allowance. This means for every £2 over £2million you'd lose £1 of allowance.
Although your business may not be liable for inheritance claims per se, does add to the value of your estate for probate purposes, and therefore your business can have an impact upon your Inheritance Tax?
All investment companies are liable for UK Inheritance Tax. If you own some properties for example, and you've got that held in a limited company, then that would be liable for UK Inheritance Tax.
If you've got a mix, you’ve got a trading business together with some property ownership, you are probably better off splitting them down into two companies. Otherwise a much more complex principle called the wholly and exclusively rule applies where HMRC determine if you get inheritance tax business relief or not. Therefore, you're not really going to be sure what your Inheritance Tax liability is going to be until you die, which is not good for planning properly.
So generally speaking investment companies are liable and they should be kept separate from trading companies for that exact purpose. But for most cases for most people their businesses are not liable for Inheritance Tax.
If you have a high value business and you want to know how to use it to reduce your personal inheritance tax liability please call us.