A business owner’s guide to Inheritance Tax and Business Relief

If you own a business, or an interest in one, you may be entitled to relief from Inheritance Tax. With Business Relief, qualifying business assets can be passed on free from Inheritance Tax either while you are still alive or after your death.

In this guide, we are going to look at how Business Relief can be a valuable estate planning tool for business owners. Here’s how it can protect the assets you’ve worked hard to build up, and help you leave a legacy for future generations.

Inheritance Tax for business owners

Inheritance Tax is a tax applied to the value of your estate after you die. Your estate essentially consists of everything you own including savings, investments, property, life insurance payouts, personal possessions, and business assets.

Currently, every person in the UK has an Inheritance Tax allowance of £325,000 (this is called the ‘nil-rate band’). This means that you typically have to pay Inheritance Tax if the value of your estate is above this threshold unless you leave the excess to your spouse, civil partner, a charity, or a community amateur sports club.

For wealth over the nil-rate band, an Inheritance Tax rate of 40% applies. So, for example, if you were to leave behind an estate worth £3 million, the Inheritance Tax due would be £1,070,000 (40% of the difference between £3 million and £325,000).

Given the high Inheritance Tax rate, it’s important to plan ahead, especially if you’re a business owner. After years of hard work, you don’t want to have to pay 40% tax on your valuable business assets.

Business Relief explained

A valuable estate planning tool, Business Relief allows you to claim Inheritance Tax relief on business assets you own, including shares in qualifying businesses. It essentially reduces the value of a business or business assets in the calculation of your Inheritance Tax liability.

To receive Business Relief, you must have owned the business or business assets for at least two years before your death. However, not every business or interest in a business qualifies for Business Relief.

Typically, the relief is available for:

  • An unincorporated qualifying trading business or an interest in one
  • Shares in an unquoted qualifying company, including a minority holding
  • Shares in a qualifying company listed on the London Stock Exchange’s Alternative Investment Market (AIM)

Note that if a business mainly deals in securities, stocks, land, or buildings, or in the making or holding of investments, it will not be eligible for Business Relief. Therefore, the relief is not available to buy-to-let investors.

With Business Relief, relief from Inheritance Tax is available at either 100% or 50%, depending on the type of business assets you own.

You can receive 100% relief on:

  • A business or interest in a business
  • Shares in an unlisted company

Meanwhile, you can obtain 50% relief on:

  • Shares controlling more than 50% of the voting rights in a listed company
  • Land, buildings, or machinery wholly or mainly used for the purposes of the business
  • Land, buildings, or machinery used in the business and held in a trust that it has the right to benefit from

Business Relief can be claimed by the executor of your Will or the administrator of your estate. Alternatively, you can give away business property or assets while you are still alive and the estate can still get relief from Inheritance Tax, as long as the property or assets qualify. However, if you do give away business property or assets, the recipient must keep them as a going concern until your death if they want to keep the relief.

The advantages of Business Relief

From an estate planning perspective, Business Relief can offer business owners several benefits beyond the tax relief.

For a start, owners don’t need to sell their business assets. This can be beneficial as offloading a business can be complicated. For example, if the economy is weak, assets may end up being sold for less than they are worth.

Secondly, there can be timing benefits. When making gifts or settling assets into trust, it usually takes seven years for assets to become free of Inheritance Tax. However, with Business Relief, qualifying assets can be passed down to beneficiaries free of Inheritance Tax on the death of the business owner provided that the assets have been held for at least two years.

Effective estate planning

Bear in mind that Business Relief is just one tool that business owners can utilise when it comes to estate planning. Other strategies to consider include:

  • Contributing to a pension – A pension is generally not considered part of one’s estate.
  • Making use of trusts or Family Investment Companies (FICs) – These structures can be used to pass on wealth tax-efficiently.
  • Using gift allowances – By gifting assets to loved ones, a business owner can significantly reduce the size of their estate.
  • Making charitable donations – If you leave money to a charity, it won’t count towards your taxable estate.

Ultimately, it’s sensible to put a proper estate plan in place with the help of an expert. An expert will make sure that you are taking advantage of all available Inheritance Tax minimisation strategies and that you are doing everything you can to pass your wealth on to future generations.

Looking for help understanding Inheritance Tax and Business Relief?

If you’re looking to protect your assets as a business owner, Business Relief could be beneficial. A valuable Inheritance Tax planning tool, it can provide relief of up to 100% when you pass away.

However, like many areas of taxation, Business Relief is complex. If you are considering using it as part of your estate planning strategy, it’s a good idea to speak to an expert first.

At Bowmore, we have decades of experience helping business owners protect their assets. We understand the challenges you face in this area of wealth management, and we can help you navigate them.

If you would like to learn more about how we can help you with your financial advice for your business, get in touch.

  • Bowmore Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority
  • The Financial Conduct Authority does not regulate Estate Planning or Inheritance Tax Planning.
  • Bowmore Financial Planning Ltd is not regulated to provide tax advice.
  • A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change. You should seek advice to understand your options at retirement.

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