If a business property forms part of an inheritance, find out how you could be eligible for inheritance tax relief of up to 100%.
Inheritance tax is designed to tax the value of a person’s estate when they die and certain gifts they make during their lifetime. An individual is entitled to their own separate inheritance tax exemptions, reliefs and nil rate band (the nil rate band is the amount on which there is no inheritance tax to pay). In addition, inheritance tax reliefs of up to 100% are potentially available where the asset being transferred is business or agricultural property.
Inheritance tax business property relief is potentially available on a transfer of ‘relevant business property’. Where business property relief is available, it applies at either 50% or 100%. Where the relevant business property is property consisting of a business or an interest in a business, or unquoted shares in a company 100% relief may be available. 50% relief may be available where the business property consists of land, buildings, machinery or plant used wholly or mainly for the purpose of the owner’s business. 50% relief may also be available on quoted shares in a company where a shareholder has control of a company. Generally, a business interest or share in a business will not qualify for business property relief where it deals (wholly or mainly) in securities, stocks or shares, land or buildings or the making or holding of investments.
In order to qualify as relevant business property the property must have been held for two years at the time it is transferred (for example on death). Provisions are in place, however, where business property has been replaced, or where business property has been acquired on the death of a spouse.
Generally, where business property is subject to a binding contract for its sale it does not qualify for business property relief.
Following the purchase the deceased’s estate will have the sale proceeds and the other business owners will have the share of the business. The proceeds in the deceased’s estate will pass in accordance with the deceased’s will. If there is no will, the proceeds will pass in accordance with the laws of intestacy.
INHERITANCE TAX AND GIFTS BETWEEN SPOUSES
It is natural for spouses to want to leave the majority, if not all, of their personal wealth to one another to help provide the survivor with financial security. Gifts between UK domiciled spouses are free from inheritance tax: there will be no inheritance tax to pay when the first spouse dies and leaves their entire estate to the surviving spouse. If a business owner dies and leaves relevant business property to their surviving spouse, business property relief is potentially available when calculating the inheritance tax liability on the surviving spouse’s estate when the surviving spouse subsequently dies. However, where the business property is sold when the business owner dies and the spouse receives money instead of a share in the business, such money will not qualify for business property relief. Any money that the surviving spouse still has on death will be assessable for inheritance tax at that time.
What is needed in these situations is an inheritance tax planning arrangement that is flexible enough to utilise business property relief on the death of the business owner, whilst allowing the surviving spouse to benefit from the proceeds but not in a way which puts those proceeds in the survivor’s estate.
All EXEMPT ASSETS
Legislation is changing all the time, and is one of the reasons that we facilitate all our succession planning, such as Wills, Trusts and Business Trusts via our associated teams of highly specialised legal and trust specialists. If you have shares in a business or have invested in EIS or VCT investments, or specialised Aim Portfolios then some, or all, of these investments, which normally be regarded as exempt from Inheritance Tax, may not be.
Instead they might be lumped in (aggregated) with the rest of your taxable estate, meaning your family may end up paying a lot more Inheritance tax than it should have.
To find out more, why not download our FREE guide to Tax & Trust Planning by clicking REDUCE MY TAX.
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Ray Best
Like his academic development, writing came late to Ray. He has written several published works, “Inheritance Tax Planning – My Way” and “Shareholder Protection & Partnership Protection” and has had four feature articles published in Tax Adviser magazine, but the publication he is most noted for is the joint collaboration with Tony Granger “Inheritance Tax Simplified”.
