Protecting your business from Inheritance Tax (IHT)

Protecting your business from Inheritance Tax

Inheritance Tax (IHT) is a tax on the estate of someone who has died and includes their property, money and possessions. IHT is often a complex area and without appropriate planning and advice can result in underpaying or overpaying what is owed.

Our IHT FAQ guide seeks to demystify some of the key and common questions surrounding IHT to provide you with clarity on the fundamentals and ensure you avoid common pitfalls.

What is Business Relief (BR)?

If you are a business owner, Business Relief (formerly Business Property Relief “BR”) may be available to protect your business from IHT.  Where available, the relief reduces the taxable value of qualifying assets by either 50% or 100% depending on the circumstances.

BR is a valuable relief for both planning for the future of the family business, and short term review of the IHT status to ascertain the estate tax exposure.

Many business owners choose to gift or transfer shares in their business to their children once they are sufficiently involved with the business. Such gifts not only may be subject to Capital Gains Tax (CGT), but also potentially subject to IHT. In these instances BR may be available to reduce any unexpected IHT arising.

On the other hand, BR is claimed within the estate where the business is passing to the beneficiaries. With appropriate review and planning the entire value of the business can be covered by BR, and removes the 40% IHT charge, thus providing more funds to pass down generations.

Business owners should therefore consider if they are able to access BR and protect the value of the business from IHT.

Whilst there have been recent talks of abolishing IHT, no formal proposals have been made and the Government are currently receiving a record take of IHT which is likely to mean it remains for the foreseeable future.

What assets can qualify for BR?

The most common assets that qualify for BR are:

• A sole trade business,
• Interest in a trading partnership,
• Shares in a trading unquoted company (including shares on the AIM market)
• Land and buildings held outside of a business, but used by the business

There are a number of conditions that both the business and the business owner must meet and detailed advice is often required to confirm that BR is currently available.

‘Trading criteria’

The concept of what a ‘trading’ business is, is also very complex and has been challenged a number of times in tax tribunals.  In essence, BR is designed to give relief from IHT for a business which is undertaking commercial activities.  The relief is not given to businesses that are not carried on for gain/profit, or businesses which are “wholly or mainly” dealing in securities, stocks and shares, land or buildings or in the making or holding of investments.

The subjective nature of ‘trading’ can make the availability of BR very uncertain for businesses involved in land and property, and generally it cannot be claimed by a letting businesses. If a business is involved in property development then there may be scope for relief, and holiday let businesses may also qualify (see our blog on the latter Holiday homes and inheritance tax).

‘Period of ownership’

To qualify, the business asset must usually have been owned throughout the two years prior to the chargeable event such as gift, transfer or death of the business owner.

Special conditions apply to the relief where business asset is gifted and the donor of the asset dies within 7 years.

How can I tell if BR is available for my business?

It is recommended that business owners take detailed advice to ensure that BR is currently available and understand any areas of subjectivity, or at risk of disagreement by HMRC.

If it is concluded that the relief cannot currently be claimed then there may be positive steps that can be taken to access the relief.

A curiosity of Inheritance Tax is that no one knows what the future holds and when the relief might be needed. IHT is generally paid when an individual dies although it can be payable (and BR can potentially be claimed) on certain lifetime events, such as creating a trust.  Therefore a business owner should be mindful of ensuring BR can be claimed in their current circumstances, and understanding what might affect their ability to claim the relief in the future.

The availability of BR is also to be accounted for when reviewing and planning Wills. With careful analysis and strategic planning IHT savings can also be made with regards to assets qualifying for BR.

One final point to note is that together with BR there are other reliefs that certain business owners may be able to claim, most notably Agricultural Property Relief for land and property used for agricultural purposes.

BR and IHT are complex areas of tax that may require expert advice to get right. If you should have any questions regarding IHT or BR, please use the form below to contact one of our experts.