Before we look consider how business owners are taxed, lets look at what inheritance tax is or IHT.
Inheritance Tax explained.
Whenever someone dies the value of their estate becomes subject to Inheritance Tax. If you are domiciled in the UK, your estate includes everything you own, including your home and certain trusts in which you may have an interest in.
The good news is; everyone is entitled to pass on assets of up to £500,000 free of Inheritance Tax including the main-residence nil rate band of £175,000 (£325,000 without the residential property allowance). This is even better for married couples and registered civil partners who can share their thresholds, transferring the unused element of their IHT-free allowance to their living spouse when they die. In total, a married couple or registered civil partners can pass on a collective £1 million in assets including their residential home without incurring a tax charge*.
The bad news is; anything that exceeds this nil-rate threshold is then liable to be taxed at a rate of 40%. This could mean that your loved ones will only be receiving a fraction of the proceeds from your life’s work. The remainder will be headed straight to the tax man. Which we don’t think is particularly fair.
*The main residence nil-rate band can only be used when passing on property to children or grandchildren.
Business Relief for IHT
Business Relief reduces the value of a business or its assets when working out how much Inheritance Tax has to be paid. Any ownership of a business, or share of a business, is included in the estate for Inheritance Tax purposes.
You can get Business Relief of either 50% or 100% on some of an estate’s business assets, which can be passed on:
- while the owner is still alive
- as part of the will
What qualifies for Business Relief
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
You can only get relief if the deceased owned the business or asset for at least 2 years before they died.
What doesn’t qualify for Business Relief
You can’t claim Business Relief if the company:
- mainly deals with securities, stocks or shares, land or buildings, or in making or holding investments
- is a not-for-profit organisation
- is being sold, unless the sale is to a company that will carry on the business and the estate will be paid mainly in shares of that company
- is being wound up, unless this is part of a process to allow the business of the company to carry on
You can’t claim Business Relief on an asset if it:
- also qualifies for Agricultural Relief
- wasn’t used mainly for business in the 2 years before it was either passed on as a gift or as part of the will
- isn’t needed for future use in the business
If part of a non-qualifying asset is used in the business, that part might qualify for Business Relief.
Example – If you use one room in a building as a shop and the other rooms are used as your home, the shop will qualify for Business Relief but the rooms won’t.
This article is just for guidance and information, please do not take it as financial advice.