Many business owners will have a Will in place but does your Will ensure your interest in the business will pass as you intend whilst also taking advantage of the Inheritance Tax (IHT) reliefs available to trading businesses?
Below, we have provided some advice on the benefits of having a Discretionary Trust in place to deal with business assets.
Business assets and Trusts
Having a Will in place directing your business assets into a Discretionary Trust (to come into effect on your death) can be particularly helpful for the following reasons:
1. You are able to appoint appropriate Trustees who will take control of the business assets and make any decisions that may follow relating to the business. These people may well be different from the people who want to have benefited from the assets.
2. You can increase the IHT exemptions available to the estate. Whilst it is possible to leave your business assets to your surviving spouse or civil partner free of IHT, you then waste the opportunity to leave those assets tax-free to a beneficiary who would otherwise have paid tax.
On Geoff’s death, his business qualifies for business property relief (BPR). His Will leaves all his estate to his wife Brenda. Brenda then sells the business and on her death leaves her estate to their children.
No IHT is payable on Geoff’s death as all his estate is inherited by Brenda and is covered by spouse exemption.
On Brenda’s death, her estate is worth more than the IHT free allowances available to her. Her estate includes £200,000 from the sale of the business. £80,000 IHT is payable on this alone.
If Geoff had left the business into a Trust and the rest of his estate to Brenda, no IHT would have been payable on his death because the business qualified for BPR exemption, and the rest of his estate was covered by spouse exemption. Then on Brenda’s death, the sale proceeds from the business would not have been included in her estate so no IHT would have been paid on these.
- You choose a number of beneficiaries who can benefit from the business assets held in the Trust. A Letter of Wishes, although not legally binding on the Trustees, offers guidance in terms of who you want to benefit from the Trust, when, and how. This offers flexibility.
On Vera’s death her business should qualify for BPR, she wants to take advantage of this relief by leaving her business assets to her children (rather than to her husband Ben, for the reasons set out in 2 above) and the balance of her estate to Ben. There are various problems with this:
- She feels that her husband Ben may need some financial support from the business during his lifetime;
- Her children, whilst over 18, have not yet decided what careers they want to pursue and whether all (or any) of them will want to be involved in the business itself; and
- Not all of her children are in stable relationships such that if they were to receive a share of the business and then die or divorce, this could leave a third party (such as a son-in-law or daughter-in-law) involved.
By leaving her business into a Trust rather than directly to the children, these decisions can be made after her death when circumstances of the business and the potential beneficiaries are clearer. If her business does not qualify for BPR when she dies, such that IHT becomes payable on the business assets, the Trust could be wound up in favour of Ben. If this is done within two years of her death, spouse exemption will apply instead so no IHT will be payable.
Seek professional advice
It is important that you seek professional advice when considering business succession planning to ensure that you do not waste any of the reliefs available.
At Nelsons, we can guide you through the process of making a Will and, as part of this, our Corporate team will consider your company documents to ensure that your wishes can actually take effect.
If you require any advice concerning the subjects discussed in this article, please contact Catherine or another member of the team in Derby, Leicester or Nottingham on 0800 024 1976 or via our online enquiry form.Contact us