Tax regime is not static

EMMA WOOLLARD, a partner at Gotelee Solicitors, says that business owners need to review their wills on a regular basis

IF YOU are in business, your family’s future could be affected by Inheritance Tax resulting from your business activities.

The tax regime is not static and it can pay to review your will from time to time to make sure that it is “efficient”.

Business Property Relief (BPR) is an Inheritance Tax relief available on certain types of business and business assets.

The relief can be claimed on a business or an interest in a business, unquoted shares, a controlling interest shareholding in a listed business and on land and assets used wholly or mainly in the business of the partnership or company.

To understand BPR, let’s look at a simple example: Bob, who owns his own building business.

One option available to Bob is to leave assets that qualify for 100% BPR directly to his children because BPR would be wasted if qualifying assets passed to his spouse, Wendy, as they would be exempt from Inheritance Tax anyway.

Alternatively, if he felt this was not an option, business assets could be placed in a trust now. If the trustees held the assets for at least two years the assets could re-qualify for BPR.

Suppose, however, that Bob would really like to leave his business assets to Wendy, as she is keen to continue in the building trade. He could leave the assets to their children and then Wendy could buy them back; the assets would then re-qualify after two years and be left again by Wendy in her Will to the children.

The children would then have inherited an unlimited value of business assets twice, free from Inheritance Tax on both occasions.

Lofty also holds shares in Bob’s building business. As shares in an unquoted trading company, these shares can qualify for 100% BPR.

Lofty is not directly connected with the running of the company but as the company is a “trading company”( i.e. not just an investment company) and Lofty has held them for at least two years, they qualify for BPR on his death.

Bob and Wendy have made a number of loans to the business. When calculating the value of business assets for Inheritance Tax purposes, any debts must be deducted from the value of the assets on which they are secured. To be tax efficient, Bob has therefore secured the loans against assets not covered by BPR.

This simple example shows the value of taking specialist legal advice on tax and Wills before deciding on such arrangements. It is a complex area and there are pitfalls that can undermine your Inheritance Tax effectiveness.

For further advice please call Emma Woollard on 01473 298109 or email emma.woollard@gotelee.co.uk .