July 18, 2018
As a business owner, planning for the future and setting targets and goals for your organisation will no doubt be a key focus. But what of the future for your business after you have gone – and how will this affect your family?
It is essential that your business is a key part of your estate planning, to ensure the smooth transition and continued functioning of the business itself, as well as enabling your family to gain the maximum tax benefit from its transfer.
When making your will, as well as making provision for the running of your business and who it will pass to, you also need to consider the tax consequences. With careful planning, if your will is structured correctly, you and your family can benefit from significant savings by taking full advantage of Business Property Relief (BPR) – but equally, if this is done incorrectly, it can result in a considerable amount of extra inheritance tax (IHT) being due.
BPR is a relief available to business owners where business assets can pass either free of IHT of subject to a reduced rate of tax, depending on the type of property held. On assets held for at least two years, BPR is available at either 50 or 100 per cent – the maximum BPR is available to those who own a business, are in a business partnership, or have shares or securities in an unquoted company.
If you are leaving your business to your spouse, this can have considerable tax benefits. Through careful planning, a will can be structured so married couples can claim BPR twice in a technique known as ‘double dipping’ – this can result in significant IHT benefits.
In such circumstances, a will is structured so that on the death of the business owner, all of the business assets that attract BPR will be left to a trust fund, and the remainder of the estate will be left to the surviving spouse. The trust fund will qualify for BPR and not attract an IHT charge, and anything left to the surviving spouse will not be subject to IHT because of the 100 per cent spousal exemption.
The trustees can then sell the business assets from the trust fund to the spouse. On the basis that the funds are available to do so, the assets are effectively swapped, leaving the spouse with business assets and the trust with chargeable ones. The spouse will then, upon their death, have assets which qualify for BPR and are not chargeable to IHT in their estate. The fund in the trust will be taxed rather than the chargeable assets in the trust fund. These will be taxed as a discretionary trust, which is at a more favourable level than the 40 per cent IHT they would otherwise have faced.
This ‘double dipping’ structure can, as well as the obvious IHT benefits, result in the surviving spouse being entitled to payments from the trust fund for the remainder of their life if necessary.
While undoubtedly a very useful tax and estate planning tool, it is essential that BPR planning is done correctly and with professional guidance, to avoid falling foul of tax penalties.
Jessica Morton is a specialist wills and probate solicitor at law firm Sintons. To speak to her about this, or any other estate planning matter, contact 0191 226 7801 or email firstname.lastname@example.org