Written by Ray Coman
Business property relief
With the full rate of inheritance tax at 40%, an exclusion from inheritance tax for business property can be highly valuable. Nevertheless, the tax benefit can also be lost. As explained in the article on inheritance tax planning, a gift to a spouse is already free of inheritance tax, and gifts to others of up to the nil rate band (of £325,000 for 2013/14) will effectively avoid inheritance tax as well. If a gift would be exempt, regardless of whether it is business property, then BPR would be wasted on this gift.
Succession planning for business owners
In the situation where a business owner wishes to retire and there is a beneficiary willing and able to continue the business, the relief can effectively reduce to nil any inheritance on tax on the transfer of partnership or company shares.
When gifting a business interest it is usually possible to avoid any capital gains by utilising hold over relief. In effect, the cost used to calculate any capital gain is transferred to the new owner.
In order to qualify as business property, the business cannot be wholly or mainly for investment. To satisfy the requirement at least 50% of the business must be for trading purposes with regard to asset value, time spent, profitability and turnover. In a situation where there are significant excepted assets, such as surplus cash, investment property or assets for private use in a business, it may be preferable to separate the business into two entities, to preserve the entitlement of the trading part of the business to inheritance tax relief. Besides preserving BPR, there would, in high likelihood, be other tax and non-tax implications to consider with the transfer of assets from a company.
A business owner may transfer shares into a trust and thereby avoid inheritance tax. A settlor who is also a trustee will still have some control over the business. Compared with an outright gift a trust can postpone complete handover of the business.
At Coman & Co. we can advise on the inheritance tax implications of transferring your business, either during your life or as part of a will arrangement. Moreover, the stamp duty, and other tax implications of different scenarios can be compared to assist you to make a decision which meets all of your objectives. Please contact us for a consultation.