How Should You, as a Business Owner, Approach Inheritance Tax?
As a business person, you have a lot to think about. One important detail that tends to get overlooked is the matter of inheritance tax. Are you a director, partner or shareholder in a business? Have you considered how your assets and stake in the company might be taxed in the event of your untimely death before retirement?
Generally speaking, inheritance tax is charged at 40% on the value of a person’s estate upon their death. It can also be charged on property held in trust, and 20% on some lifetime gifts. The good news is that there is some relief for taxes on business assets in the form of BPR, or Business Tax Relief.
Inheritance Tax Basics
To protect your assets and your family’s rights to them, the first and most important step you should take is to make a will detailing what will happen to your business assets in the unfortunate event of your death. Your will can also specify where your business share or partnership interests should be transferred.
The Articles of Association of private companies usually include ‘pre-emption rights’, which state that shares must first be offered to existing shareholders before being offered for sale to a third party. A separate Shareholders’ Agreement can set forth the wishes of all shareholders with regard to the purchasing options of any shares that become available.
Your will should be worded so that assets qualifying for BPR (Business Property Relief) are left to beneficiaries that are non-exempt.
Maximizing Business Property Relief (BPR)
BPR is available for business assets owned for at least 2 years, and it is very valuable.
100% of the following assets are deductible:
• An unincorporated business
• Shares in an unquoted company controlled by the owner
• An interest in a partnership
50% of these assets are deductible:
• Value of securities or shares in a quoted company controlled by the owner
• Assets used by a company controlled by the owner
• Assets used by a partnership in which the owner was a partner
BPR is not available on ‘excepted assets’ not used wholly for the business, or an asset subject to a binding contract for sale. If possible, your will should allow that assets qualifying for BPR be left to non-exempt beneficiaries.
Fortunately, inheritance tax legislation is quite “business friendly” in the UK, and proper estate planning can ensure that business owners are prepared. Insurance may be appropriate in some cases. The result of pre-planning will be less stress going forward and the guarantee of a desirable outcome for loved ones and surviving business partners.