A Discretionary Trust for a business owner is a Trust included within a Will for business assets that qualify for Business Property Relief. This Trust is used to make sure that any Business Property Relief (BPR) available is utilised and not lost on the death of the business owner.
Why is it best to include?
If you wanted to leave your whole estate to your spouse in your Will, this would include any business property and interest that you have. Your spouse is an exempt beneficiary for Inheritance Tax purposes.
If business property is left in a Will to a beneficiary who is already exempt from Inheritance Tax, any BPR available is lost as HMRC will not attach any available BPR to the business property because spouse exemption is available.
To ensure that any available BPR is preserved it may be advisable to include a Discretionary Trust within the Will.
You can provide for the same beneficiaries in the class of beneficiaries and would leave a Letter of Wishes to direct your Trustees as to how the business property should be dealt with. Note that with a Discretionary Trust, it is the trustees’ discretion as to how the assets are distributed and to whom within the class, giving flexibility.
Any BPR available is then attributed to the business property left to the Discretionary Trust, which can include exempt and non-exempt beneficiaries (spouse and children for example).
This provides for flexibility where you are unsure if your spouse will retain the business property, and if it is questionable if they will qualify for BPR on their death if they do retain the business property.
Discretionary Trusts for business owners – An example
Mr owns a business that qualifies for BPR. Mrs does not have any involvement in the business at all.
Mr leaves a Will that leaves everything to Mrs. But as Mrs has had no involvement in the business she does not want to keep the business and opts to sell the business. Her children want to buy the business.
On her death, the value of the business sale will form part of her estate for Inheritance Tax purposes and would not be covered by any BPR.
Had Mr left the business in a Discretionary Trust including his children in the class of beneficiaries, no Inheritance Tax would be paid on this.
Please note that BPR is not available for all businesses, and you should seek professional advice in relation to this.
How can we help?
Emma Lewin is a Senior Associate in our expert Wills and Probate team, specialising in Wills, administration of estates, grants of Probate, Powers of Attorney and Surrogacy Wills.
If you would like to speak to someone about the subjects discussed in this article, do not hesitate to contact Emma, or another member of our team in Derby, Leicester, or Nottingham on 0800 024 1976 or via our online enquiry form.
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