Estate planning and Inheritance Tax

Don’t jeopardise the livelihood of your family and your business partners

Owning a business is time-consuming. Your focus is on managing the day-to-day tasks while growing the business. There’s little time left to think about anything else, especially what would happen if something happened to you. Not having an estate plan in place risks undermining a lifetime of work and jeopardising the livelihood of your family and business partners.

It’s highly likely that a significant portion of your and your family’s wealth is tied up in the business. Although it’s not something we like to think about, securing their future is dependent on you having an appropriate estate plan that details what happens to your business if something unfortunate happens and you die prematurely.

Avoid unnecessary and costly legal difficulties
An estate plan accomplishes two things: it makes sure that someone you trust takes over your business when you’re no longer able to, or, if not, it details how exactly it would be wound down. And, as your wishes are clearly outlined, it also simplifies things for your loved ones, reducing disruption to their and your customers’ lives.

It’s important to make your wishes clear in your estate plan to avoid unnecessary and costly legal difficulties down the line. Your estate planning documents cover who is entitled to parts of your estate upon death or who should run your business if you cannot.

Outlining exactly how you’d like your shares distributed
It cannot be stressed enough how important having a Will is; otherwise, your business will be divided up according to intestacy laws. This means that your shares will pass on to your closest relatives, often split between your spouse or registered civil partner and children. If you don’t have a spouse or registered civil partner or children, shares and assets will pass to other relatives such as parents, siblings, nieces, or nephews.

This could make things difficult as they would be responsible for making business decisions or selling their shares. This would result in any business partners having to buy them out, or if not, the business could be sold or even broken up entirely. So, having a Will that outlines exactly how you’d like your shares and other assets distributed is vital to reducing additional problems and disruption.

Appointing someone to make decisions on your behalf
Most business owners know they need a Will, but not many know it’s also important to have a Lasting Power of Attorney (LPA) in place. This allows you to appoint someone to make decisions on your behalf, called an ‘attorney’ if you were to lose mental capacity through an accident or illness.

In that situation, your assets, such as any bank accounts, including joint bank accounts, would be frozen, and legislation means that a company director automatically ceases to be a director if they lose their mental capacity.

Having a LPA in place enables your attorney to make decisions that affect your business and access funds your family needs. Without one, an application has to be made to the courts to appoint a deputy. This can take months and incur additional legal fees.

Involvement in the day-to-day running of the business
Trusts are a useful tool for dealing with some of the above-mentioned issues. For instance, you may not want your beneficiaries to inherit business interests directly, but if you put your business interests into a trust, they can still benefit from the shares (i.e. still receive the dividend income) but won’t have any involvement in the day-to-day running of the business.

A trust is also useful if you become ill, incapacitated, or even retire, as you can pass control of the company to the trustees (who could be fellow business owners), and your company will continue to earn money for you and your family.

Unquoted shares in your business can receive up to 100% relief from Inheritance Tax if they qualify for Business Property Relief. Structuring your Will correctly and placing your shares in a trust can mean your beneficiaries avoid paying taxes on those shares.

How to keep business assets within the bloodline
Next, you must address any issues this might cause in a family-owned business. It’s not uncommon for one child to want to take over the family business, whereas others have no interest in doing so. There’s also the problem of ensuring your spouse is still supported if ownership is passed to your children. And the further issue of how to keep business assets within the bloodline if you wish.

Ordinarily, if you give all assets to one child, those will be jointly owned between them and any spouse, meaning other children and their grandchildren wouldn’t benefit.”

Or it may be the case that none of your family wants to be involved in the business, but you’d still want them to receive an income from it. Whatever the circumstances, we can create an estate plan that helps you smoothly transition ownership of your family business.

Funding a sale by taking out life insurance policies
Managing what happens to your shares when there are multi-owners can be complicated. One way to navigate this is to use a ‘cross option agreement’, which is an agreement between all shareholders of a private limited company.

Each shareholder gives the other shareholders the right to buy their shares in the event of their death. The sale can be funded by taking out life insurance policies for the other option holders. This means business partners can avoid complications by having unwanted new shareholders and also provide beneficiaries with an income at the same time.

You should keep your plan updated to ensure it reflects your wishes and stays abreast of legislation changes. A new marriage or birth of grandchildren could change how you want your estate divided or what happens to your business. And inheritance laws change all the time. Ensuring your plan is updated will ensure you can take advantage of those changes.

Business Property Relief (BPR)
Business Property Relief (BPR) is a valuable Inheritance Tax relief if you’re a business owner. It could provide up to 100% relief when you die if you have owned the business for at least two years. Even if you don’t own your own business, investing in a trading company can also be a useful way of mitigating Inheritance Tax.

For deaths and transfers on or after 6 April 1996, the categories of property which are capable of qualifying as relevant business property are broadly as follows with rate of relief:

• Property consisting of a business or interest in a business: 100% relief
• Control holdings of unquoted securities in a company: 100% relief
• Unquoted shares in a company: 100% relief
• Control holdings of quoted shares in a company: 50% relief
• Land, buildings, machinery or plant used by a company controlled by the transferor or by a partnership of which the transferor was a member: 50% relief
• Settled land, buildings, machinery or plant in which the transferor had an interest in possession and used in his business (This applies to lifetime transfers only): 50% relief

BPR is a worthwhile consideration
If you have a business or an interest in a business, whether a sole trader, partnership or limited company, you can claim 100% relief provided it’s inherited as a going concern. This means it is exempt from Inheritance Tax. You can get 100% relief on a business or interest in a business and shares in an unlisted company.

You can also get 50% relief on land, buildings, plant or equipment you own and that is wholly or mainly used by the business; shares controlling more than 50% of the voting rights in a listed company; land, buildings, plant or equipment used in the business and held in a trust that it has the right to benefit from. You must have owned the business or asset for at least two years to claim this relief.

There are some circumstances where BPR would not be available. For example, the following businesses do not qualify if more than half of their business involves dealing in stocks and shares, dealing in land or buildings, or making and holding investments.

BPR is a worthwhile consideration if you’re a sole trader, partner or shareholder and have owned the relevant business property for over two years. Therefore, it is possible to take advantage of BPR even if you’re not a business owner.

Since 2013, AIM-listed shares have also been held within an Individual Savings Account (ISA), which means that investors can hold BPR-qualifying shares and benefit from the tax efficiencies of an ISA. BPR-qualifying investments do not use the Inheritance Tax nil-rate band, meaning you can use this band on less liquid assets that are difficult to place outside the estate for tax purposes.

Essentially, BPR reduces the value of a business or its assets when determining how much Inheritance Tax to pay, and owners can get relief of either 50% or 100% while still alive or as part of a Will.