Understanding inheritance tax: Mitigating charges when inheriting a business

Mar 29, 2024 | Tax

Inheritance tax (IHT) can be a daunting prospect for individuals inheriting assets – it’s even more daunting when passing on a business to a family member. However, there are ways to mitigate charges through effective planning.

In this guide, we’ll quickly go over IHT, how it works when it comes to business ownership, and explore strategies to reduce the tax burden for your successors.

What is IHT and how does it work?

IHT is a tax on the estate of someone who has died, including their property, money and possessions. However, there’s usually no tax to pay if the value of the estate is below the nil-rate band of £325,000.

Everything that exceeds the nil-rate band is taxed at 40%. There is also the resident nil-rate band at £175,000, bringing your potential tax-free estate to £500,000, which you can combine with your spouse or civil servant.

Business relief for inheritance tax

Business relief, also known as business property relief, is a valuable tax relief designed to reduce or eliminate the IHT payable on certain business assets. When passing on or inheriting a business, whether it’s a sole proprietorship, partnership, or shares in a company, business relief is important to know about.

You can get 100% business relief on:

  • a business or interest in a business
  • shares in an unlisted company.

You can get 50% business relief on:

  • shares controlling more than 50% of the voting rights in a listed company
  • land, buildings or machinery owned by the deceased and used in a business they were a partner in or controlled
  • land, buildings or machinery used in the business and held in a trust that it has the right to benefit from.
  • Be aware that you can’t claim business relief on an asset if it also qualifies for agricultural relief.

When it comes to claiming relief, your executor of the will or administrator of the estate will do that if they value the estate. Your successor should fill in form IHT400 and schedule IHT413.

Other estate planning tips

In addition to business relief, there are several other estate planning strategies individuals can employ to mitigate the IHT that their successors might have to pay:

  • Lifetime gifts: Making gifts during your lifetime can reduce the value of your estate, but only if you live at least another three years after you make the gift. Make sure you understand the ins and outs of the seven year rule.
  • Trusts: Trusts can help preserve assets for future generations while minimising IHT liabilities.
  • Pension planning: Pensions are generally exempt from IHT and can be an effective way to pass wealth onto your beneficiaries. Consider maximising your pension contributions as part of your estate planning strategy.

Need help with your estate planning?

Passing on a business or inheriting one is a tough thing to plan. We can help you with your plans, though, including everything related to business relief. All you need to do is get in touch.

Alternatively, take a look at estate planning services to learn more.

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