Business Relief (BR) formerly known as Business Property Relief is a very valuable inheritance tax (IHT) relief available to owners of certain business assets which have been owned for at least two years before death. Careful planning via Wills can ensure that the value of the business, even if subsequently sold, can remain outside of the taxable estate of the family and therefore maximise the value inheritable by beneficiaries.
If a married couple hold shares in a company which could have significant value death, it is possible to pass these shares to a surviving spouse on the death of the first spouse free of inheritance tax thanks to the spousal exemption, however, families should consider the position on the second death.
If, by the time the second spouse dies, the company has been sold and the survivor was holding the cash proceeds of the entire company in their estate at the time of death then the survivor’s estate at would be faced with a significant inheritance tax liability.
Inheritance tax is currently charged at 40% on the value of assets which exceed the available nil rate band(s) – currently £325,000 each.
It is, therefore, sensible tax planning to allow your trading company shares to fall into a trust created in a Will on the first death. The survivor of a married couple (plus one or more other trustees of your choosing) would own the legal title to the shares, so would retain the voting rights but, beneficially the shares would not form part of the estate of the survivor (even if the business is subsequently sold).
Under current legislation, businesses whose main activity is trading (as opposed to the making or holding of investments) attract 100% relief from IHT so there would be no tax to pay on the first death. If the business was subsequently sold, the cash proceeds due on the holding would be held in the trust. The potential beneficiaries of the trust would be the survivor of the couple and any other family members or charities you may wish to benefit. The trust funds, and any income generated from them, which include income and capital, would be available for the benefit of the survivor but, on the survivor’s subsequent death, the value of the trust would not be considered part of their estate and therefore would not be subject to IHT at 40%.
The Will requires careful drafting in order to provide the appropriate level of flexibility which effectively safeguards assets for future generations but also ensures the surviving spouse can live comfortably.
Should you wish to discuss this further, please don’t hesitate to get in touch with a member of our Family Business Team.
