Wills for Business Owners
Inheritance tax is designed to tax the value of a person’s estate when they die and certain gifts that they made in the seven years before death.
The current laws provide that every individual has an inheritance tax threshold in the sum of £325,000. Subject to any lifetime gifts, the value of any assets exceeding the threshold will be taxed at a rate of 40%.
It is quite common for spouses and civil partners to want to leave the majority, if not all, of their assets to each other to ensure the survivor is financially secure. Gifts between spouses are free from inheritance tax regardless of the value. This means that if your estate is worth £1 million and you leave it all to a spouse or civil partner then there will be no inheritance tax to pay on the first death. The survivor will – of course – own all of the assets and have to take steps to reduce the value of the estate before the second death to minimise inheritance tax.
In addition to the threshold and spouse/civil partner exemption, inheritance tax reliefs of up to 100% are potentially available where the asset in your estate is a business or agricultural property. If you have business assets, it is crucial that you ensure your Will includes provisions that will maximise the threshold and reliefs to potentially reduce your overall inheritance tax liability.
If you own a business (or shares in a business) then you might wish to consider creating Wills in a tax efficient way to help minimise inheritance tax. Business Property Relief (BPR) is a relief from inheritance tax of 100% or 50% for “relevant business property”. 100% may be available if the business property includes land, buildings, plant or machinery used wholly or mainly for the purpose of business. 50% may be available on quoted shares in a company.
Generally, the relief will not apply if the business deals with securities, stocks, shares or property investment portfolios. In order to qualify for the relief, you (or spouse or civil partner) must have held the interest for two years prior to the time of death.
If your business interests qualify for business property relief then the value of the business interests will be exempt from inheritance tax. It would therefore be a waste to leave assets that qualify for business property relief to a spouse or civil partner because they already qualify for a different inheritance tax relief. You can avoid wasting the business property relief and still ensure your business interests remain in your family by including trusts in your Wills.
Maximising business property relief by including trusts in your Wills is a great way to benefit people who are not exempt from inheritance tax, such as your children or grandchildren. You could leave the shares or business interests outright to your children or grandchildren and leave the rest of your estate to your spouse or civil partner. Even though you have left assets to non-exempt beneficiaries, the transfer of the business interests will still be free from inheritance tax by applying for business property relief.
If you feel uncomfortable about leaving your shares or business interests outright to a child or grandchildren (if they are young, not involved in the business or if your spouse might need financial support from the business after your death) then your Will should include a discretionary trust in relation to your business interests. This means that you leave a specific gift of the business interests into a flexible trust. Your trustees have absolute discretion and flexibility about when to give the shares to any of the possible beneficiaries. None of the beneficiaries would have an absolute right to receive the assets. The list could include your spouse or civil partner, children, grandchildren and anyone else you might wish to benefit. After your death, the shares or business interests remain in the trust whilst the trustees consider the circumstances at the time of death and then decide whether to sell the shares or give the shares to some of the beneficiaries. In addition, you can leave a separate Letter of Wishes for your trustees to provide guidance about dealing with the business assets.
If the shares qualify for business property relief then this will be the most tax efficient way of dealing with your business interests and it would really be advisable to think about updating your Wills now to include such a trust. A discretionary trust in your will is flexible, it protects your business interests from passing outright to children or grandchildren who might be experiencing marital or financial difficulties, it maximises business property relief and it can also assist with keeping your options open in relation to succession planning for your business.