Very simply, a Business Relief Trust preserves the Inheritance Tax benefits for future generations whilst providing the surviving spouse or partner with full access to the assets during his or her lifetime.
Businesses that have been in existence for more than two years and carry on a trade can receive up to 100% relief from Inheritance Tax. Whilst they are shareholders or partners, the value of those shares benefits from Business Relief, so that shares can be passed down through the generations without Inheritance Tax. However, if the widow or widower receives cash for the deceased spouse’s share through a shareholder or partnership Agreement, Business Relief is lost. The proceeds of the Agreement will form part of the recipient’s estate and become fully taxable on his or her death.
There are a number of other potential practical threats that are always considered in family succession planning:
- Assets may finish up in the hands of the survivor’s future spouse or their stepchildren
- Hostile Creditors, eg Local Authorities for purposes of Long Term Care means testing, divorce,
- Giving assets or cash to children can leave them open to hostile creditors or claims from former partners
The creation of this Trust means that the surviving shareholders will buy the shares from the Trust rather than direct from the surviving spouse. A Trust can offer protection against all of the above and plus Inheritance Tax. As the Trust has a potential life span of up to 125 years, future generations of children and grandchildren can do exactly the same thing. Most importantly, there will be none of the above mentioned potential problems.
For example, the establishment of a Business Relief Trust provides a potential saving of £400,000 of Inheritance Tax payable on a shareholding worth £1 million, and possibly more as the money is passed down the generations.
Drawing up a Cross Option Agreement together with a Business Relief Trust means that the shareholders retain control of the business and that the estates of the deceased receive a fair value for those shares.
Learn more about Business Relief Trusts