In today’s fast-paced world many business owners find themselves so occupied with the day to day running and management of their business that most don’t take time to consider succession planning. The downside of this is that it may lead to unintended consequences that can be detrimental to the survival of the business in the event of illness or sudden death as well as inheritance tax (IHT) implications.
For many business owners your business represents a significant asset in your estate in terms of value. On death IHT is payable at 40% unless the business qualifies for IHT relief known as business property relief (BPR). BPR is a generous relief that reduces the value of an asset when calculating IHT. There are a number of conditions that need to be satisfied for the relief to apply. In general the business must be owned for two years and be wholly or mainly a trading entity. BPR can generate significant IHT savings. For example, a shareholder with shares in an unquoted trading company worth £1m at the date of their death can save IHT of £400,000 if the shares qualify for 100% BPR.
However, with most reliefs there are some traps. There is a misconception that if you own shares in an unquoted trading company for the required period the shares will attract full BPR. This is not necessarily the case. BPR will be restricted if there are investment assets in the business that are not used for business purposes nor required for future use in the business. This will be a question of fact. Typically such assets include shares or securities held for investment purposes, large cash deposits on the company balance sheet or an asset used for the personal benefit of the owner. In such cases only part of the value attributable to the shareholding may qualify for BPR with part subject to IHT at 40%.
Some business activities are excluded from BPR such as companies dealing in stocks and shares, land and buildings, or holding of investments. Whilst your company may have started out as a qualifying trading business it may have evolved over the years such that its activities now largely sway to the investment side meaning BPR could be lost.
Earlier this year The Office of Tax Simplification was tasked with carrying out a review of IHT including the complexities arising from IHT reliefs to identify how the tax system could be simplified. Their report is expected in the autumn with the Chancellor responsible for the actions and changes that may follow.
In the meantime as a business owner you should take action now and review the assets in your estates to understand what IHT reliefs, such as BPR, may apply. This should be kept under review as the nature or structure of your business changes over time to ensure maximum value passes to your heirs