Is Your Business Free From Inheritance Tax?
Many business owners will be pleased to learn that they can make use of “Business Property Relief” which means that HM Revenue & Customs will ignore certain business assets when calculating IHT. There are of course rules but if for the past several years you have owned the shares in your limited company which is a genuine trading company then the chances are that the value of the shares will be ignored when dealing with IHT on your death.
Many business owners find that they have lost the right to this relief without realising.
Perhaps the limited company has rented out its business premises with the result that the greater part of the company’s income now comes from rental activity rather than trading activities. This may enough to result in the relief being denied or disputed with the result that your executors have to spend time and legal fees challenging tax authority’s decision.
Selling your business can also result in an immediate loss of relief. For those fortunate enough to find a cash buyer then having sold the business you will no longer qualify for the relief – you now have a cash deposit in your bank account not shares in a trading company. Many business sales are structured so that the final purchase price is dependent upon an earn out - the seller continuing to work in the business for an agreed time after the sale. We also see sellers trying to assist buyers with structures allowing the purchase to take place over an extended period of time. The IHT treatment will depend upon what you owned at the date of death – shares in a trading company or a right to receive payment for those shares at a future date – and the nature of the business activities undertaken by the company.
The valuable Business Property Relief can be wasted – if the business assets (which qualify in their own right as exempt from IHT) are left in a Will to an IHT exempt beneficiary (such as a spouse or registered charity) then this is not tax efficient.
Inheritance tax is rarely at the forefront of anyone’s mind when buying, running or selling a business. However with the prospect of a 40% tax bill on the value of your business assets perhaps it is time to review your business structure and draw up your IHT efficient Will, with a qualified solicitor of course.