Briefing and Articles
15th December 2009
How to banish Inheritance Tax by minding your own business
GDNews Winter 2009 - Article by David SemmensBusiness Property Relief
When it comes to the dreaded subject of Inheritance Tax ("IHT"), many people know about the advantages of Business Property Relief, "BPR" for short. Provided the right conditions apply, then there is no IHT on your business assets when you die.
However, you may not know that, with careful planning and expert advice, BPR can be used to reduce or even eliminate IHT on all your assets, be they business or otherwise. Too good to be true? Well, read on.
100% relief from IHT is available to you when you die on what is called your, "Relevant Business Property". This may be:
- your business if you are a sole trader or a partner;
- unquoted company shares such as those on the alternative investment market (“AIM”); or
- unquoted securities which give you control of a company at the time you die.
50% relief is available on:
- your quoted shares which give you company control; or
- land, buildings, plant and machinery used by your business or which formed part of a trust in which you had an interest.
In all cases you must have owned your qualifying business assets for at least two years before you die. A last minute death-bed acquisition of a business will not do the trick!
So, if you own a business worth say £500,000, when you die, provided all the relevant conditions and requirements are satisfied, no IHT is payable on it, whomever you may pass it to, thanks to BPR. But beware; there are two or three traps for the unwary.
Traps for the unwary
In a family company, for instance, you must avoid any sort of contract that requires your executors to sell your shares to the other shareholders when you die. BPR will not be given. Best here to grant an option.
Furthermore, there will be no BPR if your business is wholly or mainly involved in dealing in shares, securities, land and building or in making or holding investments.
Lastly, if your business is too cash rich then BPR may be denied. Recently, a company had some £450,000 on its balance sheet, which gave rise to an IHT charge in respect of some £300,000 of it. The Revenue felt that only £150,000 was needed for the company’s future business. Much better if your board carefully minutes the investment and trading plans for the money your company is holding.
How to save even more Inheritance Tax
So, can you really use your qualifying business assets to reduce or even eliminate IHT on all your estate, both business and otherwise? Yes, but only with careful planning. Here is an example.
Say you and your spouse jointly own family company shares and AIM investments worth in total £750,000. You also have your house and a few other investments totalling £1,000,000. Your total combined wealth is therefore £1,750,000.
You and your spouse make simple wills leaving everything to each other. You die. There is, of course, no IHT payable between husband and wife and so your spouse inherits everything tax free. He or she also inherits your IHT free band which is currently £325,000 per person.
Your spouse dies two or three years in the future having kept the shares and AIM investments. He or she leaves their estate, still worth £1,750,000, to your children. There is no IHT on the first £700,000 which, hazarding a guess, is the then combined IHT nil rate band. No tax either on their business assets worth £750,000.
However, there is IHT at 40% on the remaining £300,000 in the estate so your children pay a tax bill of £120,000. Not a bad outcome? Well, actually, yes it is. If your children seek expert advice, they may well be told that they need not have paid any IHT at all. Why?
In your will you should have left your company shares and AIM investments to an appropriately drafted discretionary trust of which your spouse and children were potential beneficiaries and your spouse one of the trustees.
After your death your executors could then have given your shares and AIM investments to your spouse in exchange for an "IOU" secured against the family home. Net result? No IHT at all when your spouse dies. This is because the "IOU", as a debt, reduces your spouse’s net estate to below the £700,000 IHT free band.
Don’t try this at home! - the need for expert advice
It all seems very simple and straightforward, but actually it is not. Complex wills and other documentation will be needed. However, with skilled legal advice and assistance, such as you receive from our lawyers at Gordon Dadds, you could maximise the tax saving benefits of your business assets. So always best to mind your own business.
A version of this article appeared in the Daily Telegraph on Saturday 21 November 2009 and can be viewed by clicking on this link - view Daily Telegraph article.
David Semmens is a Partner in the Private Client Department
To read this and other articles from the Winter 2009 edition of GD News, please click here:
GDNews Winter 2009
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