Business Relief

Solution to significantly reducing a potential future Inheritance Tax bill

If you have business owner status, or have shares of a business, this will be reflected in the value of your estate. Business Relief is a valuable Inheritance Tax relief for qualifying businesses, whether making a lifetime transfer or on death.

Business relief is either 50% or 100% on an estate’s business assets. The exact relief amount will depend on the nature of the assets. Relief from Inheritance Tax on qualifying business assets has to be owned by the transferor for two years or more and until death or potentially until transfer.

Rate of relief 100% relief:
• A trading business or interest in a trading business (includes sole traders and partnerships)
• A holding of shares in an unquoted company are generally smaller companies not listed on the London Stock Exchange  (including Alternative Investment Market [AIM] companies)
• EIS investments

50% relief:
• A controlling holding of shares in a quoted company, i.e. where the individual controls more than 50% of the voting rights
• Land, buildings, machinery or plant used wholly or mainly for the purposes of the business carried on by a company or partnership

Exempt from Inheritance Tax
If you own a business interest at your death and qualify for Business Relief, then this value can be exempt from Inheritance Tax. However, there are a number of eligibility requirements, although many trading business interests owned by sole traders, partners in a partnership and shareholders in an unquoted company will qualify for this exemption.

Business relief may be lost on lifetime gifts if the recipient of the gift no longer owns the asset when the donor dies, and no Inheritance Tax is payable on the transfer of qualifying business assets into a discretionary trust. The value of qualifying business relief assets must also be included when determining if the residence nil rate band is subject to tapering.

Lifetime gifts to individuals
Lifetime gifts of business assets can benefit from business relief, provided the donor owned them for two years before the transfer. This means business owners don’t have to hold on to the qualifying assets until their death to obtain relief.

However, relief is withdrawn and the gift becomes a failed potentially exempt transfer (PET) if the donor dies within seven years of making the gift, the recipient no longer owns the asset or the asset no longer qualifies for business relief. These rules do not apply to lifetime gifts to spouses or civil partners, which are covered by the spousal exemption. A new period of ownership starts from the date of the gift, and the spouse receiving the gift won’t qualify for relief until they’ve owned the asset for two years.

Spouse exemption
The exemption is not available if your business consists wholly or mainly of dealing in securities stocks or shares, dealing in land or buildings, or making or holding investments.

Your Will may leave your business interest to be inherited by your spouse directly on your death. However, from an Inheritance Tax planning perspective, it may make sense not to do this. Due to spouse exemption, anything your spouse inherits would be Inheritance Tax-free anyway.

Inherited tax-free
If you leave a tax-exempt asset (your business interest) to a tax-exempt beneficiary (your spouse), you have wasted the opportunity to leave that asset tax-free to beneficiaries who would otherwise have paid tax (for example, your children).

If the business interest was still owned by your spouse at their death and still qualified for Business Relief at that time, this could be inherited tax-free then. If, however, your spouse had sold the business interest or this did not qualify for another reason, the exemption
would have been lost.

Potential difficulties
You could leave your business interest directly to your children in your Will. But there are two potential difficulties with this. Firstly, you cannot be certain whether your business interest will qualify for Business Relief on your death. Secondly, you don’t know whether, notwithstanding the fact that this may not be the most inheritance-efficient course of action, your spouse may need to inherit some or all of the value of the business.

If your estate exceeds your personal Inheritance Tax-free threshold, Business Relief should be considered an effective estate preservation planning strategy and a key tool for significantly reducing a potential future Inheritance Tax bill. Business owners may also want to consider making a Will, leaving their business interests to pass into a Discretionary Trust on their death.

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