Now for the good news
Your estate may be entitled to Inheritance Tax (IHT) relief if you own a business or an interest (share) in a business. One of our specialists will advise you on your best course of action combining strategies based on your situation. But whilst you wait for your call back, check out this article for a preview of what we may suggest.
IHT is the tax paid on your estate and everything you own. It must be paid by the end of the 6th month following your demise. Everyone in the UK has an IHT allowance of £325k – the nil-rate band (NRB). You’ll need to pay IHT on anything above this figure. This threshold may be higher if you are entitled to the Residence Nil Rate Band or have a transferrable Nil Rate Band / Residence Nil Rate Band.
According to Barclays, HMRC collected £5.33bn in IHT receipts for the 2020/21 tax year. It seems unfair that throughout your life, you pay tax on your income, your profits and even your purchases, yet HMRC still feel they’re entitled to 40% of everything that’s left at the end that exceeds your nil rate bands..
Thankfully, with prudent Estate Planning, you can significantly reduce your IHT and preserve your legacy. But it’s these plans which must start early as successful Estate Planning is built on “planning in advance.”
What is Business Relief (BR)/Business Property Relief (BR) and how could it help?
BR is a tax relief that allows you to claim IHT relief on business assets you own and any shares in qualifying businesses. Business owners can mistakenly assume that when they die their estates will automatically be entitled to BR and that the value of their business would be exempt from IHT.
It’s a complex area of Estate Planning that calls for expert help to obtain the full benefits.
Using Business Property Relief in Inheritance Tax planning
BR can play a pivotal role in Estate Planning. Even if you don’t own your own business, investing in a qualifying business can be an effective tactic to reduce your IHT.
Why Business Relief exists and how has it evolved?
BR was originally introduced in the 1976 Finance Act as a form of IHT protection to encourage the passing down of family businesses. It’s evolved and the eligible companies that can benefit from this tax perk have expanded. Eligible businesses can receive BR of either 50% or 100% which can be passed on while the owner is still alive or as part of the Will.
Who is eligible for Business Relief?
To qualify for BR you must have owned the business for at least two years before your death. However, if you inherit the asset from your spouse who has also owned it for under two years but the combined period of ownership exceeds two years, you will be eligible.
Not all businesses qualify. Trading businesses can be up to 100% exempt from IHT because of BR but buy-to-let portfolios don’t qualify for any relief as they’re classed as “investment businesses” by HMRC.
HMRC have clear guidelines to determine which companies qualify for BR.
As per their website, you can get 100% Business Relief on:
- A business or interest in a business
- Shares in an unlisted company
You can get 50% Business Relief on:
- Shares controlling more than 50% of the voting rights in a listed company
- Land, buildings or machinery owned by the deceased and used in a business they were a partner in or controlled
- Land, buildings or machinery used in the business and held in a trust that it has the right to benefit from
Who isn’t eligible for Business Relief?
As stated on the HMRC website, you can’t claim Business Relief if the company:
- Mainly deals with securities, stocks or shares, land or buildings, or in making or holding investments
- Is a not-for-profit organisation
- Is being sold, unless the sale is to a company that will carry on the business and the estate will be paid mainly in shares of that company
- Is being wound up, unless this is part of a process to allow the business of the company to carry on
You can’t claim Business Relief on an asset if it:
- Also qualifies for Agricultural Relief
- Wasn’t used mainly for business in the 2 years before it was either passed on as a gift or as part of the will
- Isn’t needed for future use in the business
If part of a non-qualifying asset is used in the business, that part might qualify for Business Relief.
How to reduce IHT and pass on your property business to your children
Many clients want to understand how to proceed with gifting their second home to their children. Frustratingly, when it comes to investment properties, avoiding IHT is extremely challenging.
Gifting could be a great way to pass on an asset if considered 7 years before your death, however, it’s not a decision to take lightly. If you give away property but continue to derive some benefit from it, it may be deemed a “gift with reservation of benefit” (GROB). It’ll therefore be treated as part of your estate liable for 40% IHT on your death even though you no longer own it. If you’re still living in a property you’ve gifted, you’ll have to pay market rent to avoid GROB.
Another consideration is Capital Gains (CGT). Assuming the property has increased in price since you bought it, even if you gift it, you’ll still be lumbered with a CGT bill. It’ll be calculated based on the price you paid and the market value when you gave it away.
How to claim BR relief
The Executor of the Will or Administrator of the Estate can claim BR when valuing the estate.
They’ll need to fill in both:
- Form IHT400 (Inheritance Tax account)
- Schedule IHT413 (Business or partnership interests and assets)
Why you need to call the help of an expert
IHT and different forms of relief you could benefit from are extremely complex and ever-changing. It’s far too risky to leave something so important to chance off the back of a late-night Google. An Independent Financial Adviser (IFA) specialising in Estate Planning will keep you out of HMRC’s bad books and help you reduce IHT as much as possible.
The Next Steps
As you can see, there is a lot to think about. Luckily, with our specialist advice on hand, you can mix and match a combination of strategies that work best for you.
Whatever your situation, it’s vital you get professional advice from an Estate Planner to understand how you should proceed.