Wealth Management
Business Trust | Inheritance Tax
Business Trust: Get 100% IHT Relief via Business Trust
This may be of interest, if you own a family business or have shares in a small company.
IHT is not charged on any interest in any trading business that has been owned for at least two years – this extends to sole trades; partnerships; and shares in unquoted trading companies. In this context AIM and OFEX companies count as unquoted – so an investment portfolio of AIM shares can qualify and some planning exploits this.
Most businesses (Excluding those that are purely investment or Property Companies) receive 100% IHT relief when they pass to another member of the family. So a self-employed hairdresser who leaves his/her salon and business to his/her children should not be worried about IHT on the business. However if his/her house and savings mean that he/she will be paying inheritance tax in any case, he/she can use a business trust to increase the value of the assets that pass down the line.
In brief, if you leave your business asset, say shares in a small, family company, to your spouse along with substantial savings, only the shares are tax free when your wife dies and passes your estate on to your children. However, if you leave your shares in trust for your wife, she can then purchase the shares from the trust and, then pass the shares free of IHT to your children. As the trust is free of IHT anyway, the savings are now protected.
For this to work, all parties have to run the business or own the shares for at least two years, but it’s a useful strategy to know about. Like all strategies, it may be attacked by the revenue who will challenge anything they view as an abuse of the rules in court. Even if they lose, they may have the law changed so you can’t use this in the future.
Business property relief (BPR) can provide a reduction of 100% (50% in limited circumstances) in the net value of relevant property in a qualifying business for inheritance tax (IHT) purposes.
Where circumstances permit, the IHT efficiency of a will can be maximised by leaving assets that qualify for 100% BPR directly to the children (or other non-exempt parties).
If it is not desirable to leave such assets directly, an alternative approach would be to leave the business assets in a trust, as a chargeable transfer, where the children (or others) are the beneficiaries. As the assets have a zero value for IHT purposes, there will be no IHT charge on the transfer into the trust.
