Will your business pass free of Inheritance Tax?
One of the best ways of saving Inheritance Tax is to make a Will (and get married or from 5th December 2005 enter into a Civil Partnership ) so that all property passes between husband and wife or civil partners free of inheritance tax. Having said that, it is possible to use exemptions such as utilising the Nil Rate Band (currently £275,000) and in addition making use of the business property relief where the chargeable value of “relevant business property” can be reduced by as much as 100 per cent; much though depends on the type of property and compliance with certain criteria.
The Nil Rate sum is the amount that can be given away on death without paying Inheritance Tax. Anything given to a surviving spouse or surviving civil partner is free of Inheritance tax.
One hundred per cent business property relief is available to sole traders, partnerships and holders of unquoted shares provided the business is a “trading “ business as opposed to an investment business and continues to be treated as a trading company; problems often result if the company changes its type inadvertently from trading to investment. It is vital that such business interest has been held by the deceased spouse or civil partner for at least two years, but beware - the relief may not be fully available if too much cash is maintained in the business.
So whilst marriage or civil partnerships afford complete exemption from Inheritance Tax if all the estate is left in a will to the surviving husband or wife or civil partner, the effect will be to save up for tomorrow's tax liability when the surviving husband or wife or civil partner dies; it may be more sensible to make use of Nil Rate Band by either making direct gifts to the couples children or others or to a Discretionary Trust of which the surviving spouse or civil partner children and so forth are beneficiaries and leave relevant business assets on the same basis. Much will depend on the needs of the surviving husband or wife or civil partner
In many cases husbands and wives and civil partners are business partners or shareholders in the same company, in which case it may be sensible to consider leaving the business assets to the couple's children or other family members and the cash to the husband or wife or civil partner. The survivor can then purchase the business assets from the children or the other family members and, provided he or she at the time of death is entitled to business property relief, it is entirely possible to in effect have achieved 200 per cent relief! It goes without saying that the recipient of the business interest has to be willing to sell to the survivor so this tactic has to be considered very carefully.
Despite the benefit of business property relief it does not follow that the beneficiary whoever they are is entitled to take the place of the deceased in the business as many companies and partnerships restrict who can be a shareholder or partner. Nevertheless the exemption still applies.
Finally, business property relief is available - married, a civil partner or not - and as with all Capital Tax Planning there are often Capital Gains Tax implications.
Deirdre Moss is the partner responsible for the Private Client Department at Lemon&Co. She is a member of the Society of Trust and Estate Practitioners.
December 2005
This article gives a general overview only and the legal position at the time of writing this article. It cannot be relied upon in any particular case. Specific legal advice must always be considered to include consideration as to whether the legal position contained in this article has changed since going to print. For further information and advice, please contact Deirdre Moss, Gail Leece, Gareth Horner or Trish Watkins on 01793 527141 or alternatively by email on Deirdre.Moss@lemon-co.co.uk, Gail.Leece@lemon-co.co.uk, Gareth.Horner@lemon-co.co.uk or Trish.Watkins@lemon-co.co.uk.
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