Many high-net-worth individuals and business owners see business relief as an important part of their inheritance tax planning. However, due to a shifting legislative landscape, it’s easy to make risky assumptions resulting in expensive mistakes. We look at what you need to know so you understand exactly what qualifies and what doesn’t.
Who qualifies for business relief?
Business relief can reduce up to 100% of inheritance tax on eligible business assets, but only when certain conditions are met.
You can typically claim 100% business relief on:
- A business or interest in a business
- Certain shares in an unlisted company
- A business or assets held for at least two years prior to transfer or death
Some business assets qualify for 50% business relief:
- Shares in listed companies where the deceased had control (more than 50% voting rights) and AIM shares.
- Land, buildings, or machinery owned by the deceased but used in a business they controlled or were a partner in.
However, not every business counts – there are various types of organisations that cannot claim business relief.
What doesn’t qualify for business relief?
The following businesses, companies and organisations do not qualify for business relief:
- Businesses mainly dealing in securities, land, or making/holding investments, e.g. buy-to-let and investment companies.
- Companies in the process of being wound up, unless it’s to allow continuation.
- Business assets that also qualify for agricultural relief.
- Assets not used mainly for business in the two years either prior to transfer or that won’t be needed for future use.
- Not-for-profit organisations.
Common business relief misunderstandings
Many believe that any small business, or AIM share, automatically qualifies for business relief (BR). However, this will depend on the business structure, length of ownership, and recent trading activity.
BR is only available to trading businesses. So, if your company or any of its subsidiaries are mainly involved in holding investments, you may not be eligible. Also, certain shares, including those listed on the Alternative Investment Market (AIM), no longer qualify for 100% business relief. Due to recent changes to inheritance tax (IHT) planning, relief on qualifying AIM shares and portfolios has reduced from 100% to 50%.
AIM shares are high risk, and relying on ‘DIY’ solutions or off-the-shelf products can result in lost relief or portfolio risk. The recent budget changes have tightened qualifying rules for BR with a focus on non-UK or ‘shell’ companies. Always check current legislation before investing or ask our financial planners for advice.
Buy-to-let portfolios and similar property investments typically do not qualify for BR. This is because they’re considered as investment activities, rather than trading businesses. However, some hybrid businesses operate in both trading and investment domains.
As an example – a pub that lets out rooms above might still qualify, depending on the scale and purpose of the investment activity. The distinction between trading and investment is complex, and eligibility often requires a detailed and specialist assessment.
Business relief and estate planning
Of course, business relief (BR) is only one aspect of managing your inheritance tax (IHT) liabilities. It can also be used strategically to pass control of the business to family members, helping to maintain continuity.
In a liquidation scenario, if you’re selling a business, advance planning for BR can ensure proceeds stay tax efficient. You could reinvest in assets that qualify for BR (or you could use BR-sheltered AIM portfolios). For more guidance, see our article, Selling a business: Your exit strategy.
You might be able to combine BR with other reliefs too. Although you cannot use it in conjunction with agricultural relief, there may be opportunities in terms of rural or farming assets. You might also be able to structure your business interests or sale proceeds within certain trusts to maintain relief. See our article, Business Relief: missing Will clause.
Investing and selling a business, financial advice, Nottingham
If you own a business, have an interest in the business, or you own shares, you should check your company’s eligibility for business relief. Not only can this help to reduce inheritance tax (IHT), but it can serve a purpose in a wider financial strategy.
Assumptions or ‘DIY’ fixes could put your wealth and your legacy at risk. Simply leaving your business assets to heirs isn’t enough. Making a Will and using relevant trusts can be critical when it comes to accurately reflecting your wishes and protecting business assets.
At Balance Wealth Planning, our qualified financial planning team works closely with business owners and entrepreneurs. We offer advice on tax-efficient investments and business exit strategies, helping you protect what you have, so you can preserve your legacy.
If you need advice on business relief and inheritance tax, get in touch with our financial planning team.
Sources:
https://www.gov.uk/business-relief-inheritance-tax
https://www.gov.uk/business-relief-inheritance-tax/what-qualifies-for-business-relief
https://www.marketermilk.com/blog/how-to-write-seo-blog-posts
https://www.saffery.com/insights/articles/business-property-relief/
https://techzone.aberdeenadviser.com/public/iht-est-plan/IHT-business-relief-guide
https://techzone.aberdeenadviser.com/public/iht-est-plan/future-of-IHT-planning-using-AIM
