When it comes to inheritance planning, many people are unaware there’s a missing Will clause in relation to business relief. We share some facts and a simple guide to help business owners and shareholders understand business relief and inheritance tax.
What is Business Relief?
Business Relief is a powerful tool that can help business owners mitigate the amount of inheritance tax paid on their death. It is a central tool to manage tax between generations. However, if a Business Clause isn’t written into the Will, qualifying business assets may get the full tax advantage assumed.
Here’s what you need to know when planning your business legacy:
Is inheritance tax applicable to the value of a business?
Yes, it is. Wherever there is ownership of a business or shareholders, this will be included in the estate and will be liable for inheritance tax.
How does business relief for inheritance tax work?
At the time of writing, you can get business relief from someone’s estate – 100% for certain assets and 50% for other assets. You can pass this down as part of a Will or while the owner is still alive. There are certain forms to fill in, and you will need to know the market value of the business.
What qualifies for business relief?
For 100% business relief, you must own the business, have an interest in the business, or own shares in an unlisted company. For 50% business relief, the following must apply:
- 50% voting rights on controlling shares in a listed company.
- You are the partner to the deceased who owned machinery, buildings, or land used in a business.
- The deceased owned machinery, buildings, or land used in a business, that are held in a Trust in which you are a beneficiary.
What doesn’t qualify for business relief?
If the business is a not-for-profit organisation or mainly deals with land and buildings. You cannot apply for business relief if a company deals with stocks, shares, securities, or holding investments.
Why does a Will clause matter for business relief?
There is a risk of not achieving expected inheritance tax savings unless a specific business clause is not in the Will. Amounts can only be guaranteed if business assets are specifically identified separately in the Will. Otherwise, people could miss out on the business relief available.
What is the business clause needed for a Will?
The clause needs to state that the business assets are a gift to a specific beneficiary, with ideally no other tax exemptions. If you do not list assets in this way, HMRC will consider them part of someone’s residual estate. As other forms of tax relief could apply to the estate, this could double up on exemptions, resulting in a wasted opportunity for business relief.
As the Will clause for businesses sits between legal and financial advice, there is often no advice provided. From a financial planning perspective, we are concerned that many people will be simply unaware of this Will clause. So, if you are a business owner or shareholder, we urge you to review your Will to check your business assets are listed correctly. This will ensure you can achieve the expected business relief and inheritance tax savings.
We work closely with a team of legal experts to ensure we review our clients’ Wills carefully. We aim to ensure your business assets will pass to your loved ones in the most tax-efficient way possible. In some cases, we might recommend a Business Trust for added security, to ringfences assets to achieve maximum tax relief.
If you would like to discuss business relief or financial planning for your business, get in touch to speak to our financial planners.