Inheritance Tax for business owners can be particularly complicated. However, with the right planning, you can unlock significant savings and ensure your hard-earned assets are preserved for future generations.
What is Inheritance Tax?
Inheritance Tax is a levy imposed by the Government on the estate of a deceased individual. It applies to the value of their assets, including money, property, possessions, and investments.
Inheritance Tax becomes payable if the value of the estate exceeds the ‘nil rate band’ (NRB) allowance, which is currently £325,000.
Inheritance Tax relief for married couples and civil partners
There are various exemptions which can reduce the amount of Inheritance Tax that needs to be paid (for a full list, visit the Gov.uk website).
One of the most significant is that the transfer of assets between married couples/civil partners is generally exempt from Inheritance Tax.
When the first death occurs in a married couple, any unused NRB allowance can be passed on to the surviving spouse. This can potentially double the Inheritance Tax threshold to £650,000 upon the second death.
Residential nil rate band and Inheritance Tax
In addition to the basic nil rate band entitlement, if a property used as a home is left to a surviving spouse or civil partner, there may be up to an additional £175,000 tax-free allowance, known as the ‘residential nil rate band’ (RNRB).
As with the NRB, unused RNRB on the first death of a married couple (including civil partners) can be passed on to the surviving spouse tax free.
This means that on the second death of a married couple, the inheritance tax threshold can reach a maximum of £1 million (£325k x 2 + £175k x 2), as long as the total value of the estate remains under £2 million.
What a lot of business owners don’t realise is that the value of their business is considered part of their total estate. This makes it far more likely that the total value will exceed £2 million and impact eligibility for Inheritance Tax relief.
As a result, it is important for business owners to consider the other options available to mitigate the tax burden on their estate.
Business Relief and Inheritance Tax
Business Relief (formerly known as Business Property Relief) is a mechanism designed to reduce the value of a business or its assets when calculating the Inheritance Tax that needs to be paid. Under the purview of Inheritance Tax, any ownership or share of a business is considered part of the estate.
Business owners and beneficiaries can obtain either 50% or 100% relief on certain business assets. This relief can be applicable in two scenarios:
While the owner is still alive
Business Relief can be claimed when the business owner is alive, making it a dynamic tool to plan for the future transfer of business assets.
As part of the will
In the event of the owner’s passing, Business Relief can also be claimed as part of their will, ensuring the seamless transfer of business assets to beneficiaries.
Eligible Assets for Business Relief
Business Relief can be claimed on a variety of business assets, including but not limited to:
Property and buildings
If your business owns properties or buildings, these can be eligible for Business Relief, reducing the value of these assets for Inheritance Tax purposes. Property and buildings owned personally but used by a qualifying company can attract relief at 50%.
Business owners who have unlisted shares can also benefit from Business Relief, with potential relief rates of 100%, whilst the less usual situation of a controlling interest in a quoted company attracts relief at 50%.
Assets such as machinery, which are crucial to the operation of the business, can qualify for Business Relief, providing substantial reductions in Inheritance Tax liability.
Like property and buildings, if these are owned personally and used by a company, relief is restricted to 50%.
The importance of forward planning for business owners
Failing to explore the availability and specifics of Business Relief means that many business owners are missing out on substantial savings.
Here are some key considerations for business owners:
The level of Business Relief available varies based on the ownership structure. For instance, an owner with more than half the shares in a company who also owns the premises used by that company could receive 50% Business Relief on those premises. However, if the premises were held by the company itself, 100% Business Relief would be available.
A sole trader might discover that they can increase the rate of Business Relief available on business premises from 0% to 100% by settling those premises into a trust.
Not all business activities qualify for Business Relief. For example, a property rental business may not be eligible. This can lead to situations where all Business Relief is lost, even though part of the business might qualify when examined in isolation.
Business owners should be aware that only assets required for trade or future investment within their businesses attract Business Relief. Assessing which assets qualify and how they are used within the business is crucial.
When it comes to Inheritance Tax, business owners need to carefully examine the best options for them and plan accordingly.
Speaking to a professional accountant can be invaluable to ensure that you get the right support for your specific circumstances.
How we can help
At CRM Accountants, we are committed to assisting you in effectively managing the complex landscape of Inheritance Tax for your business.
Whether you require guidance on structuring your business to optimise tax relief, understanding the intricate details of Business Relief, or ensuring that your estate planning aligns with your business goals, our dedicated team is here to provide tailored support that caters to your business’s unique needs.