Inheritance Tax Archives - MLP Law

What you need to know about Inheritance Tax

In the United Kingdom, Inheritance Tax (IHT) is a significant aspect of estate planning and financial management. Understanding the intricacies of IHT is crucial for individuals to ensure that their loved ones can inherit their assets without facing hefty tax burdens.

Thresholds and Rates

Each individual is entitled to a nil-rate band of £325,000.00, before their estate is subject to Inheritance Tax.

The current rate for Inheritance Tax is 40%.

Residence Nil-Rate Band

Individuals who pass on a residence to their direct descendants can claim a further allowance of £175,000.00 Residence Nil-Rate Band.

Spouses

There is no Inheritance Tax payable upon the first death of a married couple whereby the estate passes to the surviving spouse.

The estate is able to claim any unused Nil-Rate Band or Residence Nil-Rate Band of the spouse who died first and transfer this to the estate of the spouse on second death.

Charity Exemptions

If you leave up to 10% of your estate to charity, you can claim a reduction in the Inheritance Tax rate paid and pay a rate of 36% Inheritance Tax.

Lifetime Gifts

Gifts made during your lifetime may impact the Inheritance Tax payable by your estate. For a gift to be exempt from Inheritance Tax, you must survive for 7 years following the gift.

You do have an annual allowance of £3,000.00 for making gifts, and if unused, can carry over the previous years allowance to bring the total to £6,000.00.

Business Interests and Agricultural Property Relief

Business interests and agricultural property may be 100% or 50% exempt from Inheritance Tax.

Our Advice

We highly recommend you obtain professional legal advice to discuss your assets, and whether your estate will be subject to Inheritance Tax. Your legal advisor will then be able to advise you on the exemptions and reliefs available to you, and recommend steps you can take to minimise Inheritance Tax and protect your assets for your loved ones.

Inheritance Tax Advice for Business Owners

Inheritance Tax Advice for Business Owners

Business Property Relief (BPR) is an important form of tax relief. It allows business owners to claim Inheritance Tax (IHT) relief on business assets they own, including shares in qualifying businesses.

Here we look at the basics of BPR, explain how it works and show how BPR can be used in Inheritance Tax planning.

How does Business Property Relief work?

If you own a business, or an interest in a business, your estate may be entitled to relief from Inheritance Tax.

Inheritance Tax is the tax paid on your estate after you have passed away. Your estate consists of everything you own. Every person in the UK currently has an IHT allowance of £325,000 – this is known as the nil-rate band (NRB). If the value of your estate is higher than this figure, you will need to pay IHT on the excess.

With BPR, qualifying business assets can be exempt from IHT either while you are still alive or upon your death. This form of tax relief reduces the value of a business or business assets in the calculation of your IHT liability.

To receive BPR, you must have owned the business or business assets for at least two years before your death. Therefore, if you pass away shortly after acquiring the asset, your estate will not be eligible for the relief. The exception here is if you inherit the asset from your spouse, who also owned it for less than two years. In this scenario, your period of ownership is added to that of your late spouse. If the combined period of ownership exceeds two years, you will be eligible for BPR relief.

What businesses qualify for Business Property Relief?

Not every business or interest in a business qualifies for Business Property Relief. Typically, BPR is available for:

  • A qualifying trading business or an interest in one
  • Shares in an unlisted qualifying company, including a minority holding
  • Shares in a qualifying company listed on the Alternative Investment Market (AIM) of the London Stock Exchange

Note that if the business mainly deals in securities, stocks, land, or buildings, or in the making or holding of investments, it will not be eligible for Business Property Relief. As such, BPR is not available to buy-to-let investors. Buy-to-let businesses are treated as investment businesses.

How much IHT relief is available?

Relief from IHT is available at either 100% or 50%. This depends on the type of business assets you own.

You can receive 100% IHT relief on:

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

Meanwhile, you can receive 50% relief on:

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

How to claim BPR relief

Business Property Relief can be claimed by the executor of your will or the administrator of your estate when valuing the estate.

Two forms need to be completed. These include:

  • Form IHT400 (Inheritance Tax account)
  • Schedule IHT413 (Business or partnership interests and assets)

Bear in mind that HMRC assesses BPR when the estate makes a claim after you have died. Entitlement to the relief will depend on your business assets maintaining their BPR-qualifying status such that they qualify at that time.

Using Business Property Relief in Inheritance Tax planning

Business Property Relief can play a key role in Inheritance Tax planning even if you don’t own your own business. Investing in a qualifying business can be an effective way of reducing your IHT bill.

For example, if you are not keen to give away large sums of money during your lifetime in order to reduce your IHT liability, an investment in a BPR-qualifying investment could be another IHT strategy to consider. This strategy can provide you with greater control over your money. Unlike with a gift, you retain ownership of your money.

Another situation where BPR can be effective from an IHT planning point of view is where you would like your wealth to become exempt from IHT quickly. Unlike gifts and trusts, which generally take seven years before they are fully exempt from IHT, BPR-qualifying investments are exempt from IHT after just two years, provided they have been held for at least two years at the time of death.

An investment in a BPR-qualifying business could also be an effective strategy if you want to give the inheritance you plan to leave behind the opportunity to grow. A BPR-qualifying investment usually has the potential to increase in value. However, as with any investment, there are no guarantees.

Risks to consider

There are a number of risks to be aware of with Business Property Relief.

When you invest in a BPR-qualifying asset, your capital is at risk. It is important to understand that many BPR-qualifying assets such as unlisted or AIM-listed businesses are higher-risk investments. These kinds of investments can fall in value and be difficult to sell. You may not get back what you invested.

Another risk to be aware of is that tax rules and reliefs can change. There is no guarantee that companies that qualify today will remain BPR-qualifying assets in the future.

A valuable IHT relief  

Business Property Relief is a powerful form of tax relief that should not be ignored. A valuable IHT planning tool, it can provide relief of up to 100% after you pass away.

As with all areas of taxation, however, Business Property Relief is a complex area. If you are considering using it as part of your estate planning strategy, it is important to discuss this with a solicitor, and to take separate financial advice.

To find out more about how mlplaw can help you with inheritance tax advice for Business Owners, please don’t hesitate to contact us on either wtp@mlplaw.co.uk or 0161 926 1538