When you work hard at building your business and have done so for many years, you want to ensure that the value it has generated is protected for inheritance by your family.
For this reason, it is important that you have the following in place:
- Appropriate company documentation (such as a Partnership Agreement or a Shareholders Agreement); and
- A Will that is compatible with the company documentation.
Without these, a business owner is open to potentially unforeseen issues.
Inheritance Tax business planning – An example
Sally and Graham are married. Sally owns 80% of the shares in a fashion company TrueRetail Limited which she values at around £3m, she has owned the shares for five years. They own a house and savings between them worth £1.5m. The total joint estate, therefore, is worth £4.5m.
They have mirror image Wills leaving the estate to the survivor on their first death and equally between their two adult children on their second death.
Sally dies first. Graham inherits the whole estate. There is no Inheritance Tax (IHT) to pay as spouse exemption applies to the estate which is passed to Graham.
Graham then dies. The estate is then worth £4.5m and consists of his property and savings (he sold the shares in the business after Sally died). The tax bill on his death is calculated as follows:
- Estate value – £4,500,000
- Less x2 Nil Rate Band IHT allowances – £650,000
- Net estate – £3,850,000
- Tax at 40% – £1,540,000
If Sally and Graham had taken professional advice about their Wills, Sally might have left her company shares into a discretionary trust by Will, rather than to Graham. The trust could have been used for Graham’s benefit during his lifetime had he needed it. The effect of this would have been as follows:
There would have been no IHT to pay when Sally died. This is because she had held her shares in TrueRetail Limited for over two years, this was a trading business and the shares qualified for Business Property Relief for IHT purposes. The balance of the estate that passed to Graham was covered by spouse exemption.
When Graham died, his estate would not have included the value of the shares so the tax bill on his death would have been calculated as follows:
- Estate value – £1,500,000
- Less x2 Nil Rate Band IHT allowances – £650,000
- Less x2 Residence Nil Rate Band allowance – £350,000
- Net estate – £500,000
- Tax at 40% – £200,000
In having Will prepared in this way the children paid £1,340,000 less IHT.
It only worked because Sally’s Shareholders Agreement was drafted to allow Sally to leave her shares by Will and did not create a binding contract of sale on death.
Taking appropriate legal advice can save your family money.
How can Nelsons help?
Catherine McCannah is a Partner in our expert Wills and Probate team.
If you require any advice concerning Inheritance Tax planning for your business, 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