If you have business owner status, or have shares of a business, this will be reflected in the value of your estate. Business Relief is a valuable Inheritance Tax relief for business owners, whether making a lifetime transfer or on death. Business relief is either 50% or 100% on an estate’s business assets.
The exact relief amount will depend on the nature of the assets. This means if you own a business interest at your death and that qualifies for Business Relief then the value of this can be exempt from Inheritance Tax. But there are a number of eligibility requirements, although many trading business interests owned by sole traders, partners in a partnership and shareholders in an unquoted company will qualify for this Inheritance Tax exemption.
SPOUSE EXEMPTION
The exemption is not available if your business consists wholly or mainly of dealing in securities stocks or shares, dealing in land or buildings, or making or holding of investments.
Your Will may leave your business interest to be inherited by your spouse directly on your death. However, it may make sense, from an Inheritance Tax planning perspective, not to do this. !is is because anything your spouse inherits would be Inheritance Tax-free anyway due to spouse exemption.
INHERITED TAX-FREE
If you leave a tax-exempt asset (your business interest) to a tax-exempt beneficiary (your spouse), you have wasted the opportunity to leave that asset tax-free to beneficiaries who would otherwise have paid tax (for example, your children). If the business interest was still owned by your spouse at their death and still qualified for Business Relief at that time, this could be inherited tax-free then. If, however, your spouse had sold the business interest or this did not qualify for another reason, the exemption would have been lost.
POTENTIAL DIFFICULTIES
You could leave your business interest directly to your children in your Will. But there are two potential difficulties with this. Firstly, you cannot be certain whether your business interest will qualify for Business Relief on your death. Secondly, you don’t know whether, notwithstanding the fact that this may not be the most Inheritance Tax efficient course of action, your spouse may need to inherit some or all of the value of the business.
If you have an estate which exceeds your personal Inheritance Tax-free threshold, then Business Relief should be considered as an effective estate preservation planning strategy and a key tool for significantly reducing a potential future Inheritance Tax bill. Business owners may also want to consider making a Will leaving their business interests to pass into a Discretionary Trust on their death.
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THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE. THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.
