Never assume your business interests will avoid Inheritance Tax.
Many major shareholders and business owners are oblivious to the traps surrounding Business Relief, some of which can leave their estate at risk of a very large and unexpected Inheritance Tax (IHT) bill.
Business Relief (BR), formerly – known as Business Property Relief, is much like Entrepreneurs’ Relief; a valuable tax relief to business owners. BR ensures that on the death of a business owner, the business itself does not need to be sold or wound up to meet the IHT bill.
Business Relief reduces the value of a business or its assets when working out how much IHT has to be paid. In practice, most business property will qualify for a reduction in value for IHT purposes of 100% – i.e. total exemption.
What’s not readily appreciated is that Business Relief only applies to relevant business property, with the value of any ‘excepted assets’ being excluded. Given the potential value of this relief, it is essential that business owners understand what is not involved.
Excepted assets are left out of account when valuing property which will qualify for relief. An asset will be an excepted asset if it was neither:
- Used wholly or mainly for the purpose of the business for two years immediately before the transfer (most commonly death or gift into a discretionary trust*), nor;
- Required at the time of the transfer for the future use of the business.
For example, some business owners therefore need to be aware that if they let profits build up in the company bank account because they want to avoid paying higher rates of Income Tax on any money they take from the business. HMRC will see this surplus cash as not used in the company’s trade, and as a result a proportion of the company’s assets will be subject to IHT.
In some cases, it is possible to claim Business Relief where it can be shown that the cash is being retained for future investment in the business. However, it is not always possible, so it is best to obtain professional advice, while you are still able to look at options to rectify this.
If you would like any advice regarding your potential exposure to inheritance tax please give us a call.