Hidden away in the inheritance tax (IHT) regulations is a relief that can have a significant impact on the amount of IHT payable by estates which include business property.
What is business property?
- A business or interest in an unincorporated business, 100% relief available.
- A holding of shares in an unquoted company, 100% relief available.
- A controlling holding of shares in a quoted company (more than 50% of the voting rights), 50% relief available.
- Land, buildings or plant and machinery used in a business of which the deceased was a partner at the date of death or used by a company controlled by the deceased, 50% relief available.
- Land, buildings or plant and machinery held in a trust where the deceased had the right to benefit from the trust and the asset was used in a business carried on by the deceased, 50% relief available.
Businesses which are mainly “investment” businesses are excluded from the relief, but qualifying business assets can potentially make a significant difference to IHT payable. Consider the following example.
At the date of his death Alfred had assets of £1m in cash on deposit and shares in an unquoted trading company valued at £1m. The shares qualified as business assets. In his will he left the shares to his wife, who wanted to continue running the company and had her own cash assets. Alfred’s cash deposits were left to his daughter.
In this case the transfer of the shares from husband to wife was free of inheritance tax charge so business property relief was wasted. However, the £1m in cash left to his daughter would create an IHT bill of £270,000. (£1m less nil rate band £325,000 at 40%)
There is a quite legitimate way to restructure the Will and pay no IHT at all on Alfred’s death. As a direct result of the required estate planning, Alfred’s wife would obtain ownership of the shares and the daughter would have £1m in cash instead of £730,000 (£1m-£270,000 IHT).
The facts in this example have been somewhat simplified to demonstrate the importance of IHT planning. If you have business assets in your estate it might be an idea to review your will to ensure that maximum relief can be claimed. If you would like to know how the planning works in the above example and if it would have relevance to your estate planning, please call.