Inheritance Tax & Business Assets
Trading business assets generally qualify for “Business Relief” for Inheritance Tax (IHT) at the rate of 100%. This will include your share of the value of your business. If your share in your qualifying business is worth, say £500,000, the rate of IHT Business Relief at 100% means there is no IHT to pay on transferring it either during lifetime or death. If it is passed during your lifetime there may be Capital Gains Tax to pay, but probably at the more favourable rate with Entrepreneur’s Relief.
If you own the building where your business operates as a separate entity, “Business Relief” is at the rate of 50%.
If you own a buy to let property portfolio or a share portfolio it will be generally regarded as an investment business and therefore not qualify for Business Relief and will be fully taxable for both Capital Gains Tax and IHT.
Business Relief is a valuable IHT relief for business owners.
Why the Business Owner should have adequate protection
It is estimated that as many as two-thirds of people in the UK die without a Will, even though some own businesses worth substantial sums.
Business Protection is not just about a will. It is also about the passing of the business from one safe pair of hands to another whilst, at the same time, preserving the assets for the family left behind.
Succession Planning is vital for the life-blood of a business and the prosperity of the family. The safe future of your business and its employees will depend upon careful planning. It can be broken down into two major areas: a business will and a personal will.
A Business Will
When a shareholder or partner dies there are two vested interests in what happens to the business.
- Shareholders or partners will typically want to retain control of the business.
- The beneficiaries (usually the family members of the deceased) are most likely to want to receive the cash value of their share of the business.
If you were the one to die, depending on how your will is written, your spouse and family might become the owners of your shares. However, your spouse might have no interest in the business or, even worse, not get on with the surviving owner managers
Conversely, say your business partner dies and his shares pass to his spouse, who wants you to buy the shares, but you have no structure in place to govern how this will happen. Even worse, there are no funds available to allow you to pay for the shares on offer. The surviving spouse then decides to sell her shares to the highest bidder – one of your competitors. Can you imagine being in business with your deceased shareholder’s widow’s new partner?
WITHOUT A FORMAL AGREEMENT IN PLACE THERE ARE NO GUARANTEES
…that they will receive any money
…that there is any likelihood of finding another buyer
…they will receive any income, as there is no requirement for them to do so
…the company will be able to pay a dividend
The key requirement is to ensure the provision of the right money in the right hands at the right time.
Eliminating the Problems
There are 3 distinct elements when dealing with these matters:
- An Agreement as to how to transfer the shares
- The funds to buy the shares
- Matters arranged so that the funds can be received tax efficiently
An Agreement between the owners of the business (your “business will”)
The owners of the business can set up an Agreement where shares pass efficiently to the surviving shareholders or partners so that they retain control of the business. The agreement also allows the deceased’s heirs to receive a fair value in a tax efficient manner.
There are a number of options as to the type of agreement, for which we can provide advice, tailoring the agreement to your business.
Discussions will need to take place as to how the arrangement will be funded. In many cases the arrangement is funded by a life insurance policy. We can liaise with your financial advisers
Sole traders and sole shareholders will wonder what can be done so that their business can continue in the event of their untimely death. Is it a life-style business that provides you with an income that stops when you die? Or, does it have a value and the ability to continue without you when you have gone?
You may to seek professional advice to transform your business to one that could survive without you.
Your Personal Will
There is a lot to think about when drawing up a Will. Depending on the nature and structure of your business, there will be many potential situations to consider if you die unexpectedly. There will also be practical implications.
Inheritance Tax can be a major consideration. Many businesses will qualify for Business Relief at 100% and can often be passed on to children free of Inheritance Tax. Your children may have no aptitude for your business.
However, this does not solve the problem of avoiding the risks of:
In the case, where the estate received a large amount of cash for the shares ,Business Relief was lost. This is particularly relevant if the beneficiary is the surviving spouse or co habiting partner. When they die the cash will attract inheritance tax. Also, by the spouse or partner receiving cash for your business there can be additional threats:
- Assets may finish up in the hands of the survivor’s future spouse or their future spouse’s children
- Hostile Creditors eg Local Authorities for purposes of Long Term Care (LTC)
- Giving assets or cash to children can leave them open to hostile creditors
We can arrange for shares to pass to the heirs and the next generation (your children) in a tax efficient manner whilst providing your spouse partner full access during his or her lifetime and overcoming all of the above threats
The type of wills that are “all to my wife and if she predeceases me all to my children” or intestacy cannot will leave the proceeds of your hard work and good judgement hopelessly exposed to the above threats together with inheritance tax when your surviving spouse/partner passes.
NB Not all businesses qualify for business relief so it is important to take our specialist advice