As the number of estates affected by Inheritance Tax grows, businesses in the UK are being urged to consider the benefits of business property relief.
London and Salisbury-based law firm Wilsons has predicted a 15% rise in the number of UK estates liable for Inheritance Tax, an estimated 30,000 by the end of the upcoming tax year.
The firm has attributed the growth to the freezing of the nil-rate band in 2009. The threshold is £325,000 and marks the maximum level up to where no Inheritance Tax is applied to an estate. Wilsons have stated that it is likely to be amended again in 2019 at the earliest.
Several other factors in recent years have also caused the value of estates to rise, pushing them into the ‘qualifying’ category where Inheritance Tax is concerned. Growth in property prices and inflation has led to a rise in the number of families needing to pay the tax.
For the wealthy UK domiciled or considered domiciled people, the nil-rate band has been described as being of limited value by Wilsons Senior Associate, Imogen Buchan-Smith. On death, it provides little assistance in reducing the vulnerability of their estate from incurring Inheritance Tax.
In a similar sense, it is questionable how useful the introduction of the new residence nil-rate band will be for wealthy individuals, due to come into force on the 6 April 2017. Applying to main residence holders who bequeath the property to lineal descendants, the threshold of £2 million means that those with estates valued in excess of this are subject to reductions in their allowance; the amount will be tapered at a rate of £1 for every £2 over the threshold.
However, the availability of other tax reliefs might prove more beneficial for wealthier individuals, according to Buchan-Smith, perhaps most notably, business property relief.
In terms of policy, the main aim of the relief was to reduce the exposure to inheritance tax charges following a successive business separation. This occurs following the death of a business owner, or where they choose to give interests in their business away, to trusts or individuals for example.
Buchan-Smith highlighted that whilst the relief is important for business owners to be aware of, it is essential that they have the relevant administrative elements in place to ensure they are able to benefit from it.
“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.”
She went on to mention the specificities of the relief, in that the individual must have owned the interest for at least a period of two years before their death. Interests in a business that are owned by trustees may also be eligible for business property tax in some instances.
Buchan-Smith went on to mention the varying rate of relief available was dependent upon the specific type of business asset.
“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.”
Looking at the available relief options can make a big difference to succession planning for wealthier clients. Establishing eligibility for relief can reduce the burden of Inheritance Tax in relation to both businesses as well as families.
“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.”
