Inheritance Tax Relief

Inheritance Tax relief for business owners, at a glance.

Business Property Relief (BPR) is a valuable relief available for business owners, subject to certain conditions being fulfilled. It is important for business owners to seek advice in inheritance tax planning, to ensure that the relief is firstly available and if so, to ensure that the relief is used to its best advantage. This article will set out the concept of BPR, the ways in which use of the relief can reduce inheritance tax, and the benefits of inheritance tax planning.

When is inheritance tax usually payable?

Normally when someone passes away, inheritance tax is payable on all assets over £325,000 (the ‘Nil Rate Band’) at the rate of 40%, subject to any gifts that person made in the 7 years prior to their passing. An individual may also have an additional allowance of up to £175,000, called the ‘Residence Nil Rate Band’, if their residence passes to direct descendants. Further, married couples may be able to transfer their Nil Rate Band and Residence Nil Rate Band to the second spouse’s estate on their death, in some circumstances so that married couples may have up to one million pounds free of tax when they pass away. However, many businesses are valued at significantly more than that on an individual’s passing so it may be important to look to the reliefs available to reduce inheritance tax.

What is Business Property Relief?

BPR is a relief from inheritance tax which allows the reduction of inheritance tax for business property. The main purpose of the relief is to minimise the risk of IHT charges which may have the result of impacting the continuity of a business in a succession situation, where assets need to be sold to fund IHT. Essentially, where the conditions for BPR are met, it will reduce the value of relevant business property, either by 100% or 50% depending on the type of asset and ownership duration of the same. For example, 100% relief can be claimed where an individual has a business or interest in business (i.e. a sole trader or partnership), or shares in an unlisted company, provided that the business assets have been owned for two years’ prior to the individual’s passing.

What can go wrong in using Business Property Relief?

There are a couple of situations which may ‘waste’ the inheritance tax relief, which include where there is a specific gift of an asset which qualifies for Business Property Relief in the Will to an exempt Beneficiary. Careful attention must therefore be given to Will drafting to ensure that the benefits of the relief will be used effectively, as if the business gift falls to be distributed amongst the residuary beneficiaries, this could result in a higher inheritance tax bill.

What can be done to plan for Business Property Relief?

The application of BPR is intricate, and assessment of your wishes and the business value must be undertaken to assess the appropriate way to plan so it is important to seek advice on planning for inheritance tax, as the result is really dependent on the individual’s circumstances. It may be appropriate to set up a discretionary Trust by Will, to safeguard against payment of excessive inheritance tax.

What are the benefits of inheritance tax planning?

The main benefit of inheritance tax planning is to reduce the amount of tax payable (if any) on death. Other benefits include to better understand your estate, help your family members by putting in place arrangements to make it easier for them in accessing your finances/digital assets and dealing with your business, and to strategically manage your wealth to maximise the amount your beneficiaries gain. We recommend that you seek the appropriate advice to understand how Business Property Relief may apply to your situation.