How entrepreneurs can use Business Relief to mitigate an Inheritance Tax bill

Person discussing taxes with accountant

If you are thinking about how best to leave your wealth and possessions to your loved ones, you aren’t alone.

Current world events, in addition to the Covid pandemic, have led to more and more UK residents thinking about their futures and what would happen to their estates and possessions when they pass away.

But many UK adults aren’t aware of how Inheritance Tax (IHT) can impact how much they can pass on to their loved ones and how it is affecting more people than ever before.

According to the latest figures from HM Revenue & Customs (HMRC), IHT receipts for April 2022 to March 2023 were up to £7.1 billion, up £1 billion on the previous tax year.

In fact, these figures showed that income from IHT was up £1 billion year-on-year and latest projections suggest that by 2027/28, yearly receipts could exceed £8 billion, with almost 7% of deaths triggering an IHT charge.

If you own a business, or shares in a business, you may be entitled to Business Relief. This could reduce the amount of IHT your estate is liable for when you die. So, read on to find out how utilising Business Relief could help you to reduce your potential IHT bill.

How IHT might affect you

The current standard IHT rate is 40%. This is only charged on the part of your estate that’s above the current “nil-rate band” of £325,000.

In addition, if you choose to leave your home to a child or grandchild, your threshold can increase from £325,000 to £500,000, using the additional residence nil-rate band (RNRB).

Considering strong property price rises and asset growth over recent years, it’s now much more likely that your estate will exceed the nil-rate bands when you die – particularly if you own a business (or shares in a business).

Business Relief could help you to mitigate a potential IHT bill

If you own a business, or even shares in a business, your estate might be entitled to Business Relief from IHT. To receive this relief, you must have owned the business or business assets for at least two years before your death.

Depending on what type of business assets you own, you will be able to claim Business Relief of either 50% or 100% on some business assets. These can either be passed on while you are still alive or as part of a will.

You will be able to receive 100% IHT relief on:

  • A business or interest in a business
  • Shares in an unlisted company.

Alternatively, you can receive 50% relief on:

  • Land, buildings or machinery owned and used by the deceased in a business they were a partner in or controlled
  • Shares controlling over 50% of the voting rights in a listed company
  • Land, buildings or machinery used in the business and held in a trust that it has the right to benefit from.

You won’t be able to claim Business Relief if the company:

  • Is a not-for-profit organisation
  • Is being wound up, unless this is part of a process to enable the business to carry on
  • Mainly deals with stocks or shares, land or buildings, securities 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.

Essentially, Business Relief reduces the value of a business or its assets when working out how much IHT has to be paid.

How to utilise Business Relief in your financial planning

Even if you don’t own your own business, Business Relief can play an important role in planning for any IHT bills. In fact, investing in a qualifying business is a great way of potentially reducing that bill upon your death.

For instance, an investment in a relief-qualifying company or business could provide you with greater control over your money. You’ll also retain ownership of the asset now, rather than other IHT strategies, such as gifting, where you cede control of the asset.

Similarly, if you would like your wealth to quickly become exempt from IHT, you can utilise Business Relief-qualifying investments.

Unlike trusts and gifts, which typically take seven years to become fully exempt from IHT, investments in businesses are exempt from IHT after just two years, provided they have been held for at least two years at the time of death.

Shares can also be held within an Individual Savings Account (ISA), meaning that investors can hold Business-Relief-qualifying shares and benefit from the tax efficiencies of an ISA.

Additionally, Business-Relief qualifying investments do not use the nil-rate band, meaning you can use this band on less liquid assets that are difficult to place outside of the estate for tax purposes.

Things you must consider

Like any investments, your capital will be at risk when you invest in a Business Relief-qualifying business or asset. In fact, unlisted businesses are higher-risk investments and can sometimes fall in value and be difficult to sell. So, you might not get back what you invested.

Also, be aware that tax reliefs and rules can change at any time. There is no guarantee that qualifying companies today will remain Business Relief-qualifying assets in the future.

Get in touch

If you are looking at the most optimal way of leaving assets to your loved ones, including the use of Business Relief in your estate planning strategy, working with a financial planner can add value.

To find out how we can help you, please get in touch. Email or call us on 01454 416653.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

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