British family business leaders are being encouraged by a UK private client law firm to consider the benefits of business property relief in succession planning and as the Inheritance Tax net widens.
Wilsons, based in London and Salisbury, warned the number of UK estates liable for Inheritance Tax was forecast to rise by 15% to 30,000 in the tax year ending 5 April, 2017, up from 26,000 estates in 2015/16.
Wilsons put the increase mainly down to the Government’s move to freeze the nil-rate band at £325,000 in 2009. The band, which sets out the level up to which no Inheritance Tax is applied on an inheritance, will only be revised again in 2019, at the earliest, the firm said.
Rising inflation and property prices have pushed the value of many otherwise non-qualifying estates over the Inheritance Tax threshold and more families were being forced to pay the tax as a result.
Imogen Buchan-Smith (pictured), a Senior Associate at Wilsons, said the nil rate band will be of limited value to wealthy UK domiciled or deemed domiciled individuals, as it would do little to alleviate the Inheritance Tax exposure for their estates on death.
The additional nil-rate band in relation to devolution of main residences would not be relevant for many wealthy individuals as their estates will be valued more than the £2 million threshold. However, there were other inheritance tax reliefs, including business property relief, that were beneficial for such individuals, in some cases reducing Inheritance Tax exposure for their estates dramatically, Buchan-Smith said.
The main aim of business property relief, in policy terms, was to reduce the risk of inheritance tax charges resulting in the break-up of a business in a succession situation, as in, where the business owner dies or wishes to give away interests in the business during their lifetime, either to individuals or to, say, a trust, she added.
“Business property relief is, therefore, a very useful relief for all business owners and their advisers to be aware of. It is, however, vital that the ownership of a business and assets used in the business is structured in such a way as to ensure that the relief will be available at the relevant time, as in, on the death of the shareholder or to the extent that the business is held within a trust, on the transfer of qualifying assets to the trust as well as during the lifetime of that trust, and that the business itself is operated in such a way that it is a 'qualifying' business for business property relief purposes. Problems can arise in relation to business assets held outside the business structure and cash balances in business bank accounts.”
Buchan-Smith said business property relief applied in relation to interests in any trading business, whether that trade is conducted in or outside the UK, notwithstanding how the business was structured, either as a sole trader, via a partnership or a company.
“In order to qualify for business property relief, the interest must have been owned by the individual in question throughout the two-year period prior to death. Business interests owned by trustees can also qualify for business property tax in certain circumstances,” she said.
“Where the business interest is qualifying business property, relief at a rate of 100% should be available. Relief at a rate of 50% should be available in relation to land, buildings, machinery or plant used in that business, provided that its ownership is structured in the correct way. However, if a business deals in securities, stocks or shares, land or buildings or investments, business property relief will not be available in relation to an interest and assets used in that business.”
The availability of business property relief, and other tax reliefs, such as entrepreneurs relief and holdover relief, can assist in the succession planning process, Buchan-Smith said.
“In the main, trusts attract Inheritance Trust charges both on inception/funding and during the life of the trust. However, assets that are exempt from Inheritance Tax, such as qualifying business property, can be transferred to a trust during a business owner's lifetime without giving rise to any upfront Inheritance Tax charges and, provided that the business remains qualifying business property during the life of the trust, no ongoing Inheritance Tax charges will arise. This preferential tax treatment means that business owners can structure the business in such a way during their lifetime so as to minimise the impact of their death on the business in terms of the ownership structure of the company, and also from a tax perspective, providing their family and other individuals involved in the business with peace of mind.”