As an owner of a family business, it is important that you make sure the business can pass down tax efficiently to the next generation and the Inheritance Tax (IHT) regime is a significant risk to this.
It is vital, therefore, that family business owners take advice on estate planning.
Particularly important is the IHT relief on business assets and property, known as Business Property Relief (BPR). Owners of family businesses must take care to ensure that their business is likely to obtain this. The legislation sets out specific criteria for the application of the relief and it is not always the case that a business will get the relief, just because, broadly speaking, it is a business.
BPR can mean that business assets qualify for as much as 100% relief from IHT, and as the tax rate in excess of the nil rate amounts available is 40%, this is an extremely valuable relief for preserving the business as it passes to the next generation of the family.
The nature of the business is also key, and it will not qualify for BPR if it consists wholly or mainly of dealing in securities, stocks or shares, land or buildings or making or holding investments. Where relatively substantial amounts of surplus cash have been accumulated in the business, is also important to take care that it has not become a business which is mainly one of holding investments.
Unincorporated businesses and unquoted shares in a company can achieve 100% relief, but land, buildings and machinery in a partnership would only obtain 50%. It is, therefore, important to look at how the business is structured, in particular in terms of ownership, to see if any changes can be beneficial for the relief.
It is sensible to review any shareholders agreement in place too – in particular whether there are any rights to purchase shares on the death of a shareholder. Some wording can lead to a binding contract for sale of the shares arising on death, which does not then qualify for BPR.
Clients should also be aware that there are further conditions for the relief on any lifetime transfers of business property, and again advice should be taken to ensure the maximum relief is available.
Family business owners need to be alive to these issues and take advice to address them positively, so their business can pass on smoothly to the next generation of the family.
For further information, please contact a member of our Family Owned Businesses Team.
This article is from the March 2019 edition of The Family Business, our newsletter for those working within family-owned businesses. To download the latest issue, please visit the newsletter section of our website. Law covered as at March 2019.
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The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at March 2019.