Info Sheet

Inheritance Tax Planning for Businesses & Partnerships

Business and partnership assets are generally favoured for tax purposes to encourage entrepreneurship and continuity in the business community. The key to favourable treatment is having a “qualifying business asset” at the relevant date. It is all too easy to lose qualifying status if you do not understand the rules.
 

While most business owners focus on Entrepreneurs Relief, available at 10% since 23 June 2010 on the first £5m of capital gains realised on sale or retirement, there are also important Inheritance Tax (IHT) reliefs for people passing on the family business or partnership assets. These may include farms and estates, but the application of IHT reliefs to agricultural property is not covered by these notes. Subject to reliefs, IHT otherwise applies on lifetime transfers of assets at 20% and on death at 40%.

Most people are familiar with the IHT exemption for transfers of assets between spouses (unless one is of non-UK domicile) and the “Nil Rate Band” frozen at £325,000 for 2010-15. Above the NRB threshold gifts to children and other family members, whether personally or via a Trust, result in IHT being payable.

Less familiar are the rules for Business Property Relief (BPR).

Business Property Relief

BPR is available at 50% or 100% depending upon the type of asset and is available both in your lifetime and upon your death.

The following assets attract 100% relief from IHT:

The following assets attract 50% relief from IHT:

There are further conditions relating to the business before the relief is available:

Pitfalls on transfers (lifetime/death)

There are several situations that can lead to the loss of BPR:

If you have a business asset that qualified for BPR at the date of the transfer but later ceases to qualify, for example if the business is sold, the amount of IHT that then becomes due could be paid by ten equal interest-free annual instalments. This interest-free option applies to transfers on death and lifetime transfers where the recipient of the gift bears the burden of the tax that applies after the loss of the BPR.

The rules applying to the disposal of business assets by Will, when no lifetime IHT planning has been tackled, are complex. But there is an opportunity to maximize the value of property passing tax free to children at that stage as long as your Will is drafted in the correct way.   

Summary

Some business assets held for at least 2 years before the date of transfer (during lifetime or upon death) will qualify for either 100% or 50% relief from IHT, based on the market value of the asset at the date of the transfer.

This relief can be easily lost if the business does not pass the “wholly or mainly” test during the whole of the 7 years following the date of transfer.  In effect a transfer of a business asset to individuals or into a trust is only potentially exempt from IHT for the next 7 years.

When considering retirement, sale or restructure of your business please speak to our private client team before you commit to any contractual arrangement, so we can advise on an appropriate strategy to maximise the tax reliefs available to you throughout the transition. As a fallback, do please take advice on making your Will in a tax efficient manner just in case….

For further information please email DavidAinslie@stoneking.co.uk