5 January, 2024

Optimising the value of business relief in will planning

Inheritance tax in the UK applies to a person’s worldwide assets upon death, with estates above £325,000 taxed at a 40% rate.

Business relief (BR) is a valuable tool for business owners to reduce inheritance tax, but it’s crucial to understand the conditions for its application.

Assets qualifying for 100% relief include a business, an interest in a business, or unquoted shares in a trading company. Those qualifying for 50% relief include controlling shares in a listed trading company, land, buildings, and machinery used in a business.

BR requires assets to be owned by the deceased for at least two years before death, and relief can still apply when replacing one qualifying asset with another.

A binding contract of sale can negate BR, but a “cross-option agreement” can provide an alternative by allowing the purchase of a deceased owner’s share after death.

Some assets, called excepted assets, may reduce BR if not needed for business purposes. These include cash and assets primarily dealing in securities, stocks, shares, land, or investments.

The Butler & Others v HMRC case illustrates how the changing nature of a business can impact BR eligibility.

Maximising BR involves careful consideration, and spousal exemption can complicate matters as assets passing to a spouse are free of inheritance tax.

Drafting a will that passes business assets to someone other than a spouse can maximise BR on the first death, ensuring its availability.

Discretionary trusts in wills provide flexibility for BR assets, allowing a wide range of potential beneficiaries and avoiding automatic rights.

Trustees can transfer business assets to children free of IHT if BR applies, or to a surviving spouse within two years if BR doesn’t apply.

Trustees’ decisions are guided by a letter of wishes, and the choice of trustees is crucial for effective asset management.

Business owners should review company documents to ensure alignment with their wills regarding the transfer of business interests.

In summary, it is important to understand and strategically utilise business relief to minimise inheritance tax liabilities for business owners and highlights key considerations in estate planning.

To seek professional advice to navigate complex IHT rules and optimise estate planning, please contact Lionmede Wealth Management.

Initial financial review meetings are complimentary.

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