Business Property Relief

If you own a family business, the structure of your business interest will have an impact on the value of your estate when you pass away.  With appropriate advice there are many ways that will allow you to make the most out of tax allowances to maximise the most tax efficient outcome for your loved ones, and avoid the tax man becoming your main beneficiary.

Business Property Relief is an important Inheritance Tax Relief and can provide a reduction of certain IHT charges by 100% when shares in a private company or an interest in a business are transferred,  or by 50% when certain other business assets are transferred.

This can be especially useful if your planning involves the use of lifetime Discretionary Family Trusts.

Currently if property passes into a Trust that is over the £325,000 limit, any excess would attract Inheritance Tax at 20% immediately.  However, the same reliefs that are available on death for Business Property Relief are also available on transfers of property into such a Trust if the property qualifies.  As such, if shares in a private company or an interest in a business are transferred into the Trust there is 100% relief, and 50% relief on certain other business assets that are transferred in.

This could be advantageous to allow you to dispose of assets within your lifetime as part of your tax planning whilst having the flexibility of a Discretionary Family Trust arrangement.

Discretionary Trusts, however, are typically disadvantageous as there are ongoing Inheritance Tax charges every 10 years from the date of inception of the Trust, and when any capital leaves the Trust.  However, provided the conditions of Business Property Relief continue to be satisfied these charges should also be avoided.

Such Trusts can also be advantageous for Capital Gains Tax.  If shares are transferred into a Trust they can benefit from Capital Gains being held over to postpone the Capital Gains Tax.  In addition, if a share sale is proposed, they can be transferred to the potential beneficiary so that each beneficiary pays Capital Gains Tax at their personal rate (potentially as low as 18%) and maximising their personal allowances.

However, planning of this nature has to be holistic and any business owner considering such tax planning should be mindful of the potential Income Tax disadvantages which would have to be balanced against the potential other reliefs and advantages available.  Business owners should also carefully consider their Will to ensure it allows maximum use of Business Property Relief and other available reliefs, and consider the content of any Shareholder Agreements, Partnership Agreement or Articles of Association to ensure the proposed tax plans and use of Trusts are permitted.

For more information please contact Samantha Buckthought on 01752 292216 or email sbuckthought@wolferstans.com.