If you are a business owner, you may well already have a Will in place. But have you had that Will professionally reviewed recently to ensure that both:
- Your business will be inherited on your death as you wish; and
- The Inheritance Tax exemption which may be available for your business is preserved.
If not, we strongly recommend that you do this as, without careful planning in your Will, the valuable Inheritance Tax exemption, known as Business Property Relief, available to many businesses can easily be lost.
How does Business Property Relief work?
Generally speaking, Business Property Relief operates as follows:
- When you die, Inheritance Tax is charged on the value of your estate over and above your tax-free allowances at the rate of 40%.
- If you own a business interest at your death and that qualifies for Business Property Relief then the value of this can be exempt from Inheritance Tax.
- There are a number of eligibility requirements but many trading business interests owned by sole traders, partners in a partnership and shareholders in an unquoted company will qualify for this Inheritance Tax exemption.
- However, 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 of investments.
How can Business Property Relief be lost in a Will?
Your Will may leave your business interest to be inherited by your spouse directly on your death. However, it would make sense, from an Inheritance Tax planning perspective, not to do this. This is because anything your spouse inherits would be Inheritance Tax-free anyway due to spouse exemption.
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 Property 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.
On Geoff’s death, his business qualifies for Business Property Relief and is therefore exempt from Inheritance Tax.
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 Inheritance Tax 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 Inheritance Tax-free allowances available to her. Her estate includes £200,000 from the sale of the business and Inheritance Tax of £80,000 is payable on this alone.
If Geoff had left his business to the children on his death, no Inheritance Tax would have been paid on this.
How can you preserve Business Property Relief in your Will?
You could leave your business interest directly to your children in your Will.
There are two potential difficulties with this. Firstly, we cannot be certain whether your business interest will qualify for Business Property Relief on your death. Secondly, we don’t know whether, notwithstanding the fact that this may not be the most Inheritance Tax efficient course of action, your spouse may need to inherit some or all of the value of the business.
Many business owners will therefore make Wills leaving their business interests to pass into a Discretionary Trust on their death. You could do this by making a Will which:
- Sets up a Discretionary Trust to come into effect on your death.
- Leaves your business interest to be inherited by that Trust on your death.
- Appoints people you choose to act as the trustees to manage and control the trust.
- Names a pool of potential beneficiaries you choose who can inherit from the Trust – this could for example include your spouse, children and grandchildren.
On your death, the trustees will decide how the business interest is to be inherited by any one or more of the potential beneficiaries. You would often leave a Letter of Wishes providing guidance to them.
This arrangement provides flexibility to enable your trustees to decide how to deal with your business interest after your death taking into account the opportunities to save Inheritance Tax and the needs of your beneficiaries.
- If your business interest is exempt from Inheritance Tax on your death and your spouse does not need to inherit this, your trustees could pass this to your children tax-free.
- If, however, your business interest is not exempt from Inheritance Tax on your death, your trustees could pass this to your spouse. This will then qualify for spouse exemption provided it is done within two years of your death. Your spouse could then take advice as to how to deal with the business interest. For example, they could then gift this to your children if this was advantageous.
When considering how to deal with your business interest in your Will, it is extremely important that you seek professional advice.
How can Nelsons help?
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.
We are happy to work with your business accountant if you wish. In addition, our Corporate law team will look at your business paperwork to ensure it is compatible with the terms of your Will.Contact us