- Do you have properties that you own which are used within a business?
- Have you considered how your business partners will buy out your share and run your business on your death?
- Do your company documents state what happens on the death of a business owner?
- Have you got large cash reserves?
Business owners have so many taxes and rates to think about: income tax, capital gains tax, corporation tax, National Insurance contributions, VAT etc. It is not surprising that Inheritance Tax is often the last tax on their minds. In addition to which, businesses often use land and buildings that are owned by individuals and there can be significant cash reserves on the balance sheet. All of these factors make it increasingly important for business owners to review the business assets when considering mitigating Inheritance Tax and succession planning.
Business Property Relief (BPR)
BPR is the first relief that comes to mind when contemplating mitigating Inheritance Tax for business owners. It was originally designed to enable family firms to be left to younger generations when the major shareholder or business owner dies. When you consider the value of businesses, and the fact that Inheritance Tax is levied at 40% over an individual’s nil rate band, maximising BPR becomes a vital consideration for business owners to ensure the survival of the family business.
People often presume that BPR means that no Inheritance Tax is due on their business when they die, but this is not always the case. The general rule is that 100% BPR is available for a business, an interest in a business or shares in an unlisted company. However, it is important to review what your business does and there are important exceptions to this general rule that need to be understood.
Business owners need to appreciate that some business assets do not qualify for the full BPR relief. If the deceased owned shares that control more than 50% of the voting rights in a listed company or, more importantly, if land, buildings or machinery were owned by the deceased and used in the deceased’s business, then only 50% BPR is available. It is therefore essential to check the ownership of property used in a business because if the deceased owned the land or buildings, rather than the company, then only 50% BPR is available and there could be a sizeable Inheritance Tax liability.
In addition to the above considerations, BPR may not be available at all in the following circumstances:
- If the business asset was not owned by the deceased throughout the two years immediately preceding the death;
- For excepted assets – those assets not used “wholly or mainly” for the purpose of the business;
- If there are substantial cash balances which are not required for an identifiable future business purpose;
- If a business mainly deals with securities, stocks or shares, land or buildings or in making or holding investments;
- If a company is subject to a contract for sale or is being wound up; and
- Businesses who are not-for-profit organisations.
All business owners should think about succession planning and no-one should take Inheritance Tax reliefs for granted. We recommend that business owners regularly review their situation with the assistance of professional advisers. If you need legal advice, Everys’ Corporate and Private Client teams can help you. We work closely together to put the correct paperwork in place to mitigate Inheritance Tax as far as possible, whilst ensuring that your business can continue to operate after your death.