Key takeaways
Business owners may no longer be able pass on their business tax free on death
This is a drastic change to previous rules and a risk to businesses and families.
The rate of Inheritance Tax is 20% on businesses worth over £2.5 million
This can double up for married couple, but may not always be available.
Planning for the business and the individuals in them is now more important than ever
There are still opportunities to plan effectively, but doing nothing is no longer a viable option.
From 6 April this year, business owners can no longer pass on their businesses free of Inheritance Tax. A long-established and well implemented strategy of holding shares in a trading company until death to save both Capital Gains Tax and Inheritance Tax is no longer the clean and efficient planning it once was.
What’s changed?
Business owners holding assets on death which qualify for Business Property Relief (BPR) will now have the 100% relief from Inheritance Tax capped at £2.5 million (the BPR Cap). Any value over this amount will benefit from a 50% rate of relief which under current Inheritance Tax rules is an effective rate of 20% on death.
The BPR cap is transferrable between spouses, giving a married couple a combined BPR cap of £5 million. Whilst this sounds attractive, the risk is that opportunities to effectively plan and mitigate Inheritance Tax may be missed if succession planning is not reviewed or implemented in light of the new rules.
Risks for the family
Whilst there is beauty in simplicity, an outright gift of business assets between spouses on first death could result in additional tax on second death.
If business assets are sold after the first death by surviving spouse then, BPR will not be available at all on second death.
If business assets are retained, future growth of the business may push the value of those assets beyond the £5 million BPR cap.
Utilising a gift of business assets up to the £2.5 million BPR cap into trust could therefore be an effective way of ensuring the BPR is captured and growth remains outside of the surviving spouse’s estate.
While any Inheritance Tax arising on qualifying business assets can be paid annually over 10 years, the key question is: where does the cash come from to pay the tax?
In a worst-case scenario, families may feel pressured to facilitated a quick sale of the business, perhaps not achieving the maximum value for the business that could have be achieved in other circumstances.
Families could also be faced with a double tax hit if cash within the business is required to pay the Inheritance Tax. As the tax liability is that of the shareholder and not the company, a dividend would need to be declared, on which income tax would be payable, in addition to the Inheritance Tax liability that has arisen on death.
Careful consideration is now therefore needed from business owners, both in relation to how their Wills are structured to take effect on death, and whether lifetime planning such as gifting (perhaps with the use of trusts) or obtaining insurance to meet some or all of the Inheritance Tax liability is appropriate.
Risks for the business
The death of a key person within a business has never been easy to navigate, however, the new BPR rules create wider challenges for businesses.
For companies, the death of a shareholder now poses a real risk for the continuity of the business. Weak governance documents and succession arrangements will likely leave the company exposed to delays, disruption and potential disputes. Coupled with pressure to meet an Inheritance Tax bill, the continuity of the business could be at real risk particularly if questions over the future of the business cause concern for other interested parties like investors.
What comes next?
Having the ability to do something before it’s too late is key. From a personal perspective, reviewing wills, existing trust arrangements and wider succession planning is a priority. Ensuring any existing planning works in the context of the BPR cap will avoid any unexpected and potentially costly surprises arising on death.
If no planning has been done, then reviewing your current exposure to Inheritance Tax and understanding how this can be mitigated while still meeting your personal aims and objectives for your succession planning is essential.
For the business, reviewing articles of association, shareholders agreements and any life insurance which may be in place is very important. If no such planning has been done, then understanding how these governance documents will benefit the business and the family is an important place to start.
Many business owners should also review the way in which profits are taken (or not as the case may be) from the company. Avoiding a double tax hit if cash is needed to pay an Inheritance Tax liability can be well managed during lifetime with the right advice.
With a change to the Inheritance Tax landscape, business owners will ultimately need to tread more carefully when it comes to succession planning and understanding their current position and the options available will put business owners on a much firmer footing.
Hill Dickinson’s Private Client team work closely with business owners, identifying risks for both the family and the business and working to implement effective and tax efficient succession planning for future generations of both the family and the business. Contact us today to discuss how we can support you.
