Most business owners will know that there are Inheritance Tax (IHT) reliefs available on business and agricultural assets, and many clients confidently expect that no IHT will be charged on these assets after their death, says Tobias Gleed-Owen of Hewitsons.
Will my estate pay tax on my business after my death?
Most of these problems can be easily addressed by good lifetime tax planning. This article focuses on Business Property Relief rather than Agricultural Property Relief which has separate rules.
Business Property Relief
This article isn’t intended to set out the full detailed test for Business Property Relief but, broadly speaking, the relief is available for ‘Relevant Business Property’ on both lifetime transfers and transfers following a death. Here are some of the most common problems faced by executors claiming Business Property Relief after a death:
Problem 1 – Length of Ownership – the business property must have been owned for over 2 years prior to the transfer. A person who received the business property from their spouse on death is deemed to have owned it since their spouse acquired it. There are also relaxations of this rule for replacement business property and for quick successions where a person receives the business property upon the death of the previous owner but then dies themselves within 2 years.
There are other rules applicable to these relaxations so advice should be taken for full details. Our team can help clients set up structures to make full use of these relaxations to ensure that there is no risk relief failing because of the 2-year rule.
Problem 2 – Assets Owned by the Client Personally and Used by the Business – if the deceased owned land, buildings, machinery or plant in their personal name, but that asset was used by a company that the deceased controlled or a partnership in which he was a partner, the asset will only qualify for 50% relief for IHT. Our team has helped many clients re-arrange their assets to ensure that 100% relief will be available after their death.
Problem 3 – Excess Cash in the Business – there are many reasons why a business owner may choose to retain excess cash in company accounts, some of which relate to the business’s tax position and future cash needs, and some of which relate to the owner’s circumstances. However, business accounts will be examined by HMRC after death and any suspiciously large cash balances will be investigated: any cash held which cannot be justified for the business’s reasonable trading needs will not qualify for IHT relief. Often the advice we give to clients includes ensuring that good business records are in place explaining the business reasons for retaining cash in the business accounts.
Problem 4 – Non-Trading Activities – broadly speaking, business property relief is intended to cover trading businesses, but it excludes businesses that deal “wholly or mainly” with (a) securities, stocks or shares; (b) land or buildings; or (c) making or holding investments. There have been many cases on this issue, and it is surprisingly easy for an ostensibly trading business to fail this test. For instance:
- a farm company which lets out cottages on normal residential tenancies may fail to qualify if the rental income exceeds profit on farming activities after all running costs are deducted from farming revenue. Even if this is not the case, if the farmland itself is not a company asset but the cottages are, then the company may fail to qualify if the value of the cottages causes the company balance sheet to be weighted towards let properties rather than trading capital.
- Businesses which operate any sort of letting or licencing of land are especially at risk. Holiday rental businesses, livery businesses and caravan parks have all been the subject of legal battles with HMRC, and the owners of any businesses should take advice early if they wish to take the opportunity to adjust their business practices to qualify for IHT relief.
Problem 5 – Business Subject to Contract for Sale or Winding Up – Generally speaking, business assets will immediately cease to qualify for tax relief as soon as they become subject to a contract for sale or winding-up/liquidation proceedings. There are exceptions available for incorporating or restructuring a business and full advice should be taken on these rules. Any owner considering selling or winding up the business should take advice before signing any contract to consider the impact on the estate’s IHT exposure and take steps to mitigate this before relief is lost.
Many business owners don’t know they have a contract in place – it can be hidden in the Articles or in a cross–option agreement.
Problem 6 – Nil Rate Band Legacies in the Will – These legacies were commonly used by spouses so that, on the first death, the maximum sum that can be paid free of IHT is paid as a legacy, to utilise the nil rate band, and the remainder is transferred to the surviving spouse. Clients with Nil Rate Band legacies in their Will should be aware that the wording of these legacies may cause all their relieved business (and agricultural) assets to be included with the legacy. This may be a good thing for the family’s future tax planning, especially if the legacy is structured as a discretionary trust and if the trustees are in agreement as to who should ultimately receive the business assets. However, in old Wills especially it was a common practice to include non-trust Nil Rate Band legacies, usually to children. In these circumstances, it may come as a surprise to the surviving spouse to learn that the business assets will be included in the legacy to the children and will not pass to the survivor.
The Private Wealth Team at Hewitsons LLP are specialists in Inheritance Tax planning, with particular expertise in advising business owners. We would be delighted to meet with you to discuss any of the above matters, and to carry out a full tax and estate planning review. If you would like us to advise, please contact Tobias Gleed-Owen on 01223 532718 or click here to email Tobias.
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