Prior to the passing of a business owner, it is important that relevant arrangements are in place so the business can be transferred smoothly. Similarly, it may be beneficial to assess whether any assets involved in the business are eligible for inheritance tax (IHT) relief.
Awareness of IHT relief available for businesses can form a vital part of succession planning. As well as reducing increased levels of costs thought to be owed, it can also provide peace of mind for business owners and confidence in the success of the business following their passing.
Where the value of a business or the assets associated with it are eligible for business relief, the level of IHT due may be reduced. This similarly applies to shares as well as ownership. During a time where stress levels are likely to be high, any means of simplifying the transfer process and minimising cost are likely to be welcomed and potentially be of great benefit to a company.
The amount of relief available may be either 50% or 100% depending upon the nature of the asset and its purpose within the business.
Assets are only eligible for relief if they have been owned by the deceased for a period of at least two years prior to death.
50% relief may be obtained for:
- Buildings, machinery or land owned by the deceased, used in a business they controlled or were a partner within
- Buildings, machinery or land used in a business and held under a trust which it has the right to benefit from
- Any shares which control over 50% of voting rights within a listed company
100% relief may be obtained for:
- A business or shares within a business
- Shares within an unlisted company
Not all types of business are eligible for business relief however, and the following will usually not qualify:
- Not-for-profit organisations
- Businesses which deal largely with stocks or shares, land or buildings, securities, or in the holding or creation of investments
- Businesses that are being sold, unless the sale is to a someone who will continue to run the company and shares of the company are the main source of payment
- Businesses that are being wound up, unless this is required to enable it to continue running
Specific assets will also not qualify if the following applies:
- The asset was not majorly used in the past two years within the business, prior to it being passed on
- The asset is not required for future use within the business
- The asset also qualified for agricultural relief. Full details on eligibility for agricultural relief can be found here
If an asset does not qualify but a part of it is used within the business, that part may be eligible for relief.
As well as being passed on in a will, the business or assets can be transferred whilst the owner is still alive and therefore be eligible for business relief on IHT. The owner must have owned the asset for at least two years prior to the date it is passed on. If an asset is disposed of in any way and its value has increased during the time of ownership, it may be subject to either capital gains or income tax.
Transfer of the asset may be done through gifting. If the recipient wishes to keep the relief however, they must continue to keep them as a going concern until the donor passes away. The recipient is permitted to replace the assets with something else of equal value, provided it’s for use within the business. If a gift is made more than seven years prior to the death of the donor, it is no longer counted towards their estate for the purpose of IHT.
