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Business Relief Inheritance Tax: Dealing with an Inheritance Tax Bombshell

Business Relief Inhritance Tax – What is it? What is allowed to be passed on without further tax implications? Most business shares in privately-held trading businesses are exempt from Inheritance Tax (IHT) as a result of a measure known as Business Property Relief (BPR). But the moment those shares are sold, BPR is lost and the proceeds become part of your taxable estate.

What Qualifies as Business Relief Inheritance Tax

100% Business relief is available on:

  • A busines or interest in a business
  • Shares in an unlisted company

50% Business relief is available on

  • Land, Buildings or machinery owned by the deceased and used in the business (or held in a suitable trust)
  • Shares controlling more than 50% of the voting rights

What Doesn’t Qualify as Business Relief Inheritance Tax

What doesn’t qualify are areas like:

  • Not for profit organisations
  • Is currently being wound up or sold (unless sold to be carried on as a business)
  • (Assets) Hadn’t been used in the last 2 years as a business
  • (Assets) Isn’t needed for future in the business
  • (Assets) Qualify agricultural relief

How to claim Inheritance Tax Business Relief

To claim business relief on inheritance tax, you must complete both:

General Inheritance Tax – The allowance.

The first £325,000 handed down by an individual, or £650,000 passed on to dependents by a married couple or civil partnership (no IHT is payable between spouses or civil partners) is currently exempt from IHT thanks to an allowance known as the Nil Rate Band (NRB). This figure can rise to £500,000 (and therefore £1million) if you leave it to your children or grandchildren and your estate is worth less than £2 million. Any non-exempt assets above the NRB are taxed at a rate of 40 per cent.

Fortunately, there are a number of measures you can take to minimise IHT. Most require forward planning and could have unforeseen ramifications. So you should always seek advice or do proper research before proceeding with any of the strategies outlined below.

Pensions

Assets held in defined contribution pension schemes do not form part of your taxable estate. It can often be accessed flexibly from the age of 55, and can be passed down the generations very tax-efficiently.

Before you sell your business it may, therefore, make sense to use any excess cash within it to maximise contributions to your pension fund, subject to the annual and lifetime allowances set by the government.

Give it away

The politician Roy Jenkins famously described IHT as, A voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue .

If you do trust your children then anything you give them now will begin to benefit from relief from IHT after three years. Once seven years have elapsed it will potentially fall entirely outside your taxable estate.

Be careful, though, once you have made a ‘potentially exempt transfer’ any other large gifts you make within the next seven years could reset the clock. This means that it might take up to 14 years for the initial transfer to become IHT-free. If you intend to give away a lot of money it makes sense, from an IHT perspective, to do it all in the same tax year.

Individuals can also make gifts of up to £3,000 per year that are immediately IHT-free, as are unlimited gifts out of excess income. The word “excess” is important – You can’t just spend all your capital while giving your state pension to your grandchildren.

Trusts

If giving away your assets is unappealing, or you may need to dip into them later, you could settle them into trusts.

Again, after seven years, this would potentially fall outside your estate. The most common strategy is, every seven years, for each spouse or civil partner to endow a discretionary nil rate band trust with £325,000 (£650,000 per couple).

Trusts are complex and involve ongoing costs. However, they can potentially reduce your heirs” IHT liability while also giving you control over your assets during your lifetime and beyond.

AIM shares

The shares in many businesses traded on the “junior” AIM stock market potentially qualify for BPR, and well-diversified AIM portfolios form part of many wealthy individuals” estate plans. These assets are by nature risky so, while they can play an important role in reducing IHT liabilities, they should not usually make up a majority of your investments.

AIM shares bought within three years of selling your business should immediately qualify for BPR. If purchased more than three years after your sale you will need to hold them for two years before they become exempt from IHT.

Family Home Allowance

The Residence Nil Rate Band (RNRB), is currently set at £175,000 before IHT becomes payable but can result in relief on £350,000 if the estate is passed first from husband or wife to the other and then through the survivor to the children or grandchildren. This can save £70,000 of inheritance tax.

HMRC adds assets that benefit from BPR back into its calculation of “net” estate value, so AIM shares won’t help larger estates regain their RNRB.

Gifts made, and trusts endowed, under the seven-year rule can, however, potentially reduce net estate value, enabling the heirs of many former business owners to benefit from this valuable tax relief.

Business Relief Inheritance Tax  – Summary

Inheritance Tax can be complex and is a tax many feel is unjust as it comes from purchases that will already have been subject to tax. Currently, it is here to stay. It is right you do not pay more tax than is due and an accountant or probate solicitor will help guide you through the process formally and give the up-to-date legal requirements. This article hopefully helps as a guide to your options.

 

Mike Walker is financial planner at Prest Financial Planning.

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