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Are you a business owner looking for ways to reduce your tax bill? Increasingly, using Business Relief is a popular option – especially when it comes to reducing taxes on an estate (inheritance tax, or IHT). Below, our financial planning team at WMM shows how Business Relief works, the ways it can be used in a tax plan and some things to consider when doing so. We hope you find this useful and invite you to contact us if you’d like to discuss your own investment strategy.
What is Business Relief?
Business Relief, in short, is a calculation that determines the value of your business – or its assets – for IHT purposes. When an individual passes away, their estate (possessions, property etc.) need to be valued to determine what is taken by the taxman. In 2021-22, IHT stands at 40% on the value of an estate over the Nil Rate Band (currently £325,000, plus up to £175,000 additional allowance for personal residence providing your estate is valued under £2 million), so this can add up to a considerable sum without careful financial planning.
Business Relief was initially introduced by the UK government to help ensure continuity of UK businesses when their owners died. After all, 40% on a business owner’s estate could amount to £100,000s – which, without this relief, might need to come out of the business assets; thus threatening its stability. Business Relief enables the executor(s) of an estate to claim 50% or 100% IHT relief on the value of a business (or its assets) when the owner passes.
Example & application
Suppose a business owner dies and leaves £1m to his children in the form of the family home, cash and shares in her business. In 2021-22, an individual can “shield” up to £500,000 from IHT if the main residence is passed down to direct descendants (e.g. children). The £500,000 left, therefore, includes the value of the business shares and cash savings. Here, assuming that the shares qualify for Business Relief, this allows them to be passed down to the children without IHT. This only leaves the cash that might be subject to IHT at 40%.
As this example suggests, Business Relief can be a powerful estate planning tool to help keep family businesses going. A business – or its assets – can also be gifted to beneficiaries whilst the owner is still alive. To qualify for Business Relief, certain conditions must be met first:
- Prior to gifting the asset, the donor must have owned it for at least two years.
- The person receiving the gift must operate the business “as a going concern”. Or, he/she must employ the asset for the purpose of the business until the donor passes away.
- The asset originally gifted away (e.g. equipment) has been replaced with a similar asset, amounting to equal value, for the purpose of the business.
Where Business Relief can apply
Not all businesses or business assets qualify for Business Relief. So, it’s important to have a firm grasp of the rules – and discuss them with your financial planner – before making any assumptions about your estate plan. Examples of assets that can qualify for 100% relief are:
- Shares in a private limited company (ltd).
- Ownership of a sole trader business.
- Shares in an unlisted public limited company (PLC).
Other assets might qualify only for 50% relief. A prominent example is shares controlling over 50% of a public limited company’s voting rights. Other assets do not qualify at all, such as:
- Shares of publicly-listed stocks (e.g. those on the London Stock Exchange) – excepting the aforementioned caveat.
- Interest in a not-for-profit business or charity.
- Property for which Agricultural Relief is being claimed
Invitation
Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM.
You can call us on 01869 331469
