Inheritance Tax for Business Owners
As a business owner with your own business assets value you should be aware that Inheritance Tax (IHT) is treated on your business is different from personal property.
Today the current nil rate band for Inheritance Tax (IHT) payable on a deceased person’s estate is 40% above £325,000. Businesses can benefit from a more generous taxation system because of their role in providing economic growth and may qualify for Business Property Relief (BPR).
Business Property Relief can:
- Provide 100% relief from IHT on a sole trader’s business or partnership interests and can apply to shares in trading companies that are not quoted on a recognised stock exchange
- There is no limit to the value of BPR which can be claimed
- Shares quoted on the Alternative Investment Market can also be eligible for 100% BPR
- BPR is also available on land, machinery, plant and buildings used for business purposes
Tax help and advice from an experienced Inheritance tax planner is essential when looking at Business Property Relief as there are always things to look out for.
- Business assets must have been owned by the donor for two years to qualify for BPR and the business in respect of which a claim is made must also be wholly or mainly a trading company.
- Investment companies and businesses dealing in shares, stocks, securities, lands or buildings do not qualify for BPR.
- As a small business owner, the current law particularly benefits small businesses that are family owned trading companies. They will be likely to qualify for Business Property Relief (BPR) and make the most of the possible IHT saving.
There are several issues to consider and expert advice is essential when undertaking IHT planning with regard to business assets, especially in the context of a family run business.
- It may be preferable for a donor to leave IHT-exempt assets to a beneficiary such as a Trust other than their spouse or civil partner.
- There are no savings if business assets are passed to a beneficiary who would not be liable for IHT, for example, a transfer of business assets qualifying for BPR to a spouse would achieve no IHT saving on that transfer because transfers between spouses are normally exempt from IHT in any event.
- No BPR is available where there is a binding contract for the sale of a business. This might occur where there are a small number of shareholders who have a shareholders’ agreement which requires that should one of them die, their executors will sell his or her holding to the remaining shareholders, who are required to buy it.
Even where shares would not qualify for BPR, the £3,000 annual tax-free allowance for IHT is available. A shareholder can use this to pass shares to anyone of their choosing. This can be used to give the beneficiary a gradually increasing interest in the company, reducing the IHT payable on the donor’s death. However, care should be taken as there are likely to be tax implications and professional tax help and tax advice is recommended.
As a small business owner, you may choose to sell or wind up your business rather than leave it to beneficiaries in your Will. You would then be able to leave the liquid capital to your beneficiaries instead. This has the advantage that the value of the business would be precisely fixed and available in cash. However, cash does not qualify for BPR, so this approach has significant IHT drawbacks.
Most owners of small limited companies should consider setting up a Lifetime Discretionary Trust to pass the business shares on death. This tax planning has major benefits which can be explained in a meeting with a Bluebond Inheritance tax adviser.
When thinking of Inheritance Tax (IHT), business owners can look at many ways to benefit from a more generous taxation system by seeking professional tax advice.
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