Using The Value Of Your Business To Reduce Personal Inheritance Tax
If you spend most of your working time running a small business it is very easy to ignore, or to delay, putting in place suitable provisions to ensure that maximum value can be passed on to your heirs when you are no longer able to run the business.
How to qualify for BPR
One very important point to check is that your interest in the business will qualify for business property relief (BPR) from inheritance tax. For your shares to qualify for BPR your company must be wholly or mainly a trading entity. So, if the pendulum has swung too far towards lrge cash holdings investments or investment properties HMRC may, on your death, want to tax the entire value of your shares at 40 per cent, including that attributable to the trading elements.
Leaving everything to your spouse?
If you are married then you may have a straightforward will leaving everything to your spouse if you die first. There is nothing wrong with that – or is there? It does have the advantage of simplicity, but you run the risk of wasting the IHT relief. Everything you leave to your spouse is exempt from IHT anyway assuming that you are both domiciled in the UK. So, by leaving your relieved shares to your spouse you waste the relief.
Suppose your spouse then sells the shares, the cash sale proceeds will be fully chargeable to IHT and so your children will bear IHT at 40 per cent on your spouse’s subsequent death on value which you could have passed on at no cost.
Specific gift in your will
Including a specific gift in your will to pass your shares to a discretionary trust for your spouse, and your children can have the best of both worlds – your estate can claim the BPR and your spouse can still benefit from the shares themselves or from the proceeds of their sale. If the shares have been sold then their cash value should be ring-fenced from any charge to IHT on your spouse’s death.
Business interests under a trust structure
Leaving your business interests to the next generation under a trust structure introduces a number of additional factors to consider. Absolutely key to making this structure work is your choice of trustees. While trustees do not necessarily need to have any legal or accounting knowledge, as they can pay professionals for this, they do need to have a healthy quota of common sense, and it is imperative they are able to work well with each other.
Using a trust structure also means you can keep your shares together as a single holding and still benefit a large group of people – usually your spouse, children and grandchildren. The role of trustee is not one to be accepted lightly. It can bring with it some onerous duties and responsibilities. In particular, the trustees’ duty is to maximise the benefit their beneficiaries receive.
How is it done?
- A Business Trust is set up for each shareholder of a trading LTD company during life time at a minimum fixed fee of £1700 for each trust.
- The executors use BPR to gift shares into the business trust on first death and then give the shares to spouse in exchange for an interest free IOU payable to the trustees on demand. As the value of the company is based on the value at death if there is a sale soon after there would be no real CGT issue.
- The surviving spouse may sell the shares or the trustees could sell the shares. If the surviving spouse holds the shares until death BPR could again be claimed on the value. This creates a debt on the surviving spouses Estate based upon the value of the shares on the first spouse death. (Valuation is done by the firm’s accountants and charged to the estate).
If the company is worth several hundred thousand pounds this will create a debt on the surviving spouse’s personal estate thus saving a significant amount in IHT for a very low upfront fee.
Asset protection benefits of a discretionary trust
There are a range of additional asset protection benefits of a discretionary trust to keeping the money in the family bloodline on divorce or bankruptcy of children or grandchildren. This planning is useful to all clients whose Limited companies value exceed £100,000.
As always experienced advice in this area is essential