Inheritance Tax: Could your Estate benefit from Business Relief?
Business Relief is one of the most valuable reliefs available for reducing your Inheritance Tax liability.
The relief can reduce the charge to Inheritance Tax by 50% and even 100% on business assets of unlimited value. This applies not only to those who are actively engaged in a business but also to those who simply hold shares in the right type of company.
So, what type of business assets qualify for Business Relief?
In brief, the relief applies to:
- a business or an interest in a business, e.g. a share in a partnership, would qualify for 100% relief
- a holding of shares in an unquoted company, which can include shares in the Unlisted Securities Market and the Alternative Investment Market, such shares could qualify for 100% relief
- a controlling holding of shares in a quoted company would qualify for 50% relief
- machinery, property and buildings owned by a partner or controlling shareholder and used only or mainly in the business of the partnership or company. Such machinery, property and buildings would qualify for 50% relief.
In addition to the above, you must have owned the business interest, shares or asset for at least two years before death.
The relief also applies to lifetime gifts, although the relief applies differently to Capital Gains Tax. Also, in certain circumstances, if the person making the gift dies within seven years of making the gift, the relief can be clawed back. Thus, it is important to seek professional advice if you wish to make use of Business Relief when making gifts or setting up trusts.
What doesn’t qualify for Business Relief?
It is important to note that not all businesses will qualify for Business Relief. For instance, you can’t claim Business Relief if the business of the partnership or company is wholly or mainly engaged in dealing in land or buildings, securities, stocks or shares, or in making or holding investments.
This would exclude businesses where the business simply held a number of properties, and the main purpose of the business is to rent these properties.
Business Relief would also not apply to most family investment companies. Such companies can come about quite accidently over time as a family winds-down its business until it ends up mostly holding cash and investments.
In addition, an asset in a qualifying business will not attract the relief if it is:
- not used wholly or mainly for the purpose of the business throughout the two years immediately before the transfer or death
- not required at the time of the transfer or death for the identified future use for the purpose of the business
- used fully or mainly for the personal benefit of the transferor or a person connected to them, such as a close relative.
If you think your business interest or assets fall under one of these exclusions, then it is important that you seek professional advice to see whether there are any changes you could make to improve your chances of qualifying for Business Relief.
There are pre-emptive steps you could take. For example, instead of selling shares in a family business and losing what would qualify for Business Relief, you could set aside some shares in the business for the benefit of others, for example, children, by placing the shares within a trust. If this is done before the business is sold, the Business Relief could still be utilised when gifting the shares out of your estate and into the trust. The business can then be subsequently sold and will not affect the availability of relief (unless clawback applies).
If done correctly, Business Relief can enable the transfer of assets of substantial value from one generation to another without incurring Inheritance Tax.
Contact our Wills and Estate Planning solicitors today
If you have any questions or would like advice on business relief and inheritance tax planning, please get in touch with our specialist Wills and Estate Planning team by using our online enquiry form or by calling 0330 404 0768.
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