If you own a business, or part of one, you may be thinking about how your assets are passed on after your death.
Even though that may seem a long way off, the further ahead you can plan, the more likely you are to maximise the benefits for your children, grandchildren or whoever inherits your estate or is trusted with the future of your business.
There are various tax reliefs that can apply to business assets, and ways your estate can be structured to maximise their effectiveness.
Here’s what you need to know.
What happens to business assets for the purposes of Inheritance Tax?
There are several ways in which you can own a business – as a sole trader, as an owner in partnership with others, or as the owner of some or all the shares in a limited company.
The business’s assets, in whatever form you own them, become part of your estate for the purposes of Inheritance Tax upon your death.
Where a business has been owned for at least two years, there is a specific tax relief, known as Business Property Relief (BPR) that can reduce the amount of Inheritance Tax payable on business assets that relate to a trading business.
The term ‘trading business’ is key – BPR can apply to assets that generate income by trading, but does not apply to a business, or part of a business, that is wholly or mainly concerned with holding investments such as property, land or shares in other companies.
What is the most tax-efficient way to pass on the assets of a trading business?
When passing on business assets in your Will, the primary concern is usually to maximise the benefits of Business Property Relief from Inheritance Tax, ensuring that the opportunities it presents are not wasted. This is particularly important if the assets are going to a surviving spouse who may later wish to pass them on to the next generation.
Usually, the best way to achieve this will be for your Will to be drafted to include a trust that will specifically capture your qualifying business assets.
When putting this is in place it is important to ensure that the assets placed within it do qualify for BPR – that they are genuinely part of a trading business.
How is it decided if a business is trading for the purposes of Business Property Relief?
To qualify for BPR, not more than 50% of the business can be concerned with the holding or making of investments such as property, land, shares or other passive investments.
The way this is assessed involves looking at a variety of factors relating to the business – namely:
- The amount of time directors spend on the trading aspects of the business
- The capital assets owned by the business
- From where the business’s income and profit are generated
No one of these factors is determinative in deciding whether the business meets the 50% figure but a view should be taken in the round. A specialist tax lawyer will be able to help you assess your business and make representations to HMRC based on the analysis.
Sometimes the lines can be blurred – for example in agricultural family businesses there may be an asset such as a former workers’ cottage or barn that is now rented out to a business or tourists to generate income. Where possible, ensuring that everything is done to help those assets fall down on the trading side of the business, rather than a passive source of income, would help maximise the potential of BPR.
What should I do now to plan for passing my business on?
As with all aspects of Wills, inheritance and tax planning, it’s best to make plans as early as you can and to have goals in mind.
For some owners who run their family business though a company, they may think about reorganising the share capital with the aim of pushing capital value down to the next generation while retaining an income stream for the older one, enabling them to continue living comfortably.
This would see different classes of shares created – the capital bearing shares gifted down while the income class is retained.
Other methods will be appropriate for unincorporated business structures but in every case the Capital Gains Tax and Inheritance Tax implications must be considered.
When a business is not family owned, but the owner is keen to see it continue to trade after their death, options such as Employee Ownership Trusts can be tax efficient.
Thrings’ Succession and Tax Planning specialists work with sole traders, partnerships and shareholders of family businesses to help them find the most efficient ways of passing on estates. For more information see here.
