Business owner? Why Business Relief is an increasingly popular way of reducing tax

female business owner holding tablet in art studio

If you’ve been thinking more about how you plan to leave your wealth to your loved ones when you die, you’re not alone.

A new study published in Money Age reveals that 3 in 10 (29%) investors aged between 55 and 64 said that the pandemic has made them think more about their mortality and seek estate planning advice to make sure they have plans in place when they pass away.

If you’re a business owner, then Business Relief is one way for you to mitigate a potential Inheritance Tax (IHT) liability. Furthermore, the Money Age research suggests using this relief is rising in popularity as a way to reduce IHT.

17% of advisers are now recommending Business Relief as the preferred IHT solution for clients at least once a month. Additionally, a further third (32%) are recommending it every three months, meaning that almost half of financial advisers and planners are recommending Business Relief at least once a quarter.

Read on to find out more about how Business Relief could help you.

Business Relief can reduce your IHT bill if you hold certain assets

In recent years, IHT has been a growing source of revenue for the Treasury. IHT receipts reached £5.4 billion in the 2020/21 tax year with thousands of estates liable for the tax.

Many experts predict that the tax take will rise in coming years, partly because the chancellor has frozen the threshold at which IHT is due until 2026.

So, it’s perhaps no surprise that business owners and other wealthier individuals are seeking ways to mitigate a potential tax bill.

Business Relief (sometimes called “Business Property Relief”) is a relief designed to increase investment in certain types of trading businesses.

It can be a useful way to reduce potential tax as IHT legislation provides relief for certain types of business or business property included in either a lifetime transfer or your estate on death.

For deaths and transfers, on or after 6 April 1996, the categories of property which can qualify as relevant business property are broadly:

  • Unquoted shares in a company (100% relief)
  • Property consisting of a business or interest in a business (100% relief)
  • Control holdings of unquoted securities in a company (100% relief)
  • Control holdings of quoted shares in a company (50% relief)
  • Land, buildings, machinery, or plant used by a company controlled by the transferor or by a partnership of which the transferor was a member (50% relief)
  • Settled land, buildings, machinery, or plant in which the transferor had an interest in possession and used in their business – for lifetime transfers only (50% relief).

What all this means is that, where it applies, you are exempt from paying Inheritance Tax on your share of a business partnership, or on the value of unquoted shares.

To qualify for Business Relief, you must hold investments for at least two years before death.

The benefits of using Business Relief

In the 2021/22 tax year, the IHT thresholds are:

  • £325,000 – the “nil-rate band”
  • £175,000 – the “residence nil-rate band”, applicable if you intend to leave your home to children or grandchildren.

Most people can leave between £325,000 and £1 million to beneficiaries tax-free depending on your specific circumstances.

If the value of your estate is more than the IHT threshold, then it might be time to start considering Business Relief. There are some advantages to using Business Relief, which compare favourably to other more conventional IHT strategies.

Retain greater control

Retaining qualifying shares in your own name gives you greater control over your assets.

For example, if you don’t want to gift large sums of money during your lifetime in order to reduce your IHT liability, you could consider investments in Business Relief-qualifying investments. Unlike with a gift, you retain ownership of your money.

IHT mitigation happens sooner

If you need your wealth to become exempt from IHT quickly, Business Relief could help. This is because it takes just two years for qualifying shares to provide 100% relief against IHT, provided you still hold the shares at the point of passing.

Compare this to using gifts and trusts where any gifts you make typically form part of your estate for up to seven years.

Maintain your IHT nil-rate band

Your Business Relief-qualifying investments will not eat away at your IHT nil-rate band, preserving this tax-free allowance for less liquid assets, such as property.

Give your inheritance the chance to grow

A Business Relief-qualifying investment can also be an effective strategy if you want to give the inheritance you plan to leave behind the opportunity to grow.

These investments usually have the potential to increase in value. However, as with any investment, there are no guarantees.

Some downsides to consider

There are several risks to be aware of with using Business Relief.

The first is that, if you invest in a Business Relief-qualifying asset, your capital is at risk. It’s important to understand that many such investments, such as unlisted or AIM-listed businesses, are higher-risk investments.

These kinds of investments can fall in value and be difficult to sell. Consequently, you may not get back what you invested.

Another risk you should be aware of is that tax rules and reliefs can change. There’s no guarantee that companies that qualify today will remain Business Relief-qualifying assets in the future.

Furthermore, Business Relief doesn’t apply to all companies or assets. For example, you can’t claim Business Relief if the company:

  • Is a not-for-profit organisation
  • Mainly deals with securities, stocks or shares, land or buildings, or in making or holding investments
  • Is being sold, unless the sale is to a company that will carry on the business and the estate will be paid mainly in shares of that company.

As with any investment, you should carefully consider the risks associated with dealing with unquoted, largely illiquid companies with an increased potential for valuation volatility.

Get in touch

To find out whether Business Relief could benefit you, please get in touch. Email or call 01454 416 653.

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