If you are a business owner the chances are that you will have poured a great deal of time, hard work and love into your business. You want to make sure that if something happened to you, your family and business would be properly looked after. It’s not a pleasant thought but it is important that you consider how that would happen and plan for the future.
Business Property Relief
Tax is a major issue for many business people and they want to ensure that their business is passed onto their family without having to be sold to pay tax. Inheritance Tax (IHT) is currently 40% on estates over a certain size but many business owners are aware of Business Property Relief (BPR) and its ability to effectively reduce the size of an estate and therefore its tax bill.
BPR is also available on lifetime gifts so it is important to consider at all times, not just in the unfortunate eventuality of death.
BPR is a very valuable relief but there are some misconceptions and pitfalls, which is why it is so important to take professional advice about it.
Some people running a business wrongly assume that it’s available on all businesses and business assets so that their business will automatically be free from IHT.
However it only applies to certain businesses and assets. The clue is in the public policy reason for creating the relief in the first place, which was largely to allow trading businesses to continue without having to be sold in the event of an owner’s death. This means that it applies to trading businesses and not investment ones. So if a business is wholly or mainly engaged in investment activities, like a buy to let company, then BPR will not apply.
If a company is mixed so that some is trading and some investment, then HMRC will look at what is the major or dominant part and BPR would not apply if it is found to be investments.
This risk could be mitigated by splitting the business and for example having separate trading and investment companies. But it would be necessary to avoid the trading company being a subsidiary of the investment company. There will be other tax and organisational issues arising from forming a separate company and because this is a complex area you should take professional advice. It is also often said that the tax tail should not wag the business dog so it is important to consider what your objectives are before embarking on restructuring your business affairs. Our specialist corporate and estate planning lawyers can help you come to the decisions that are best for you and your business on this.
Many business owners keep business assets such as property, plant and machinery, used by their business outside the business and in personal ownership. BPR on a qualifying business is a 100% relief but BPR on such property, plant and machinery, is 50%, if they qualify at all. Again the rules are complex and it is important to consider with a professional advisor which of your business interests qualify for which level of relief and consider also restructuring the ownership arrangements to get the best relief, if that is your principal aim.
Leaving a business to a spouse or civil partner
It may not be wise to leave a business to a spouse or civil partner because any inheritance by spouses and civil partners is automatically exempt from IHT anyway and it is therefore potentially a waste of the BPR. We can advise you on how to leave your business to your family in a way that still gives your spouse or civil partner income but protects the BPR for other generations.
You also need to be careful about not keeping surplus cash in the business if you want to maximise BPR.Only necessary working capital qualifies for BPR so it may be best to take the surplus cash out and do other things with it which minimise IHT. We can also advise you on that.
BPR applies to going concerns which are not subject to sale. Going back to the public policy reason for the relief the government wanted to avoid forcing sales. It is possible to inadvertently be caught out on that if, for example, partners provide for compulsory purchase of a deceased partners share on death. So it is important to have shareholder or partnership agreements drawn up in a way that preserves BPR if that is an objective.
However it is also important for those agreements to deal with other situations such as disputes between shareholders and partners, and realising value in the business. Our corporate law department specialise in these arrangements and will help you achieve what you want to from your business structure.
Divorce and estate planning
As a final point it is also important to think about would happen in the event of divorce. You can enter into a prenuptial agreement before you get married or a post nuptial agreement if you are already married, which sets out should happen and how assets are divided. This can be particularly important if you do not want divorce to force sale of your business. Those agreements are not legally binding but the courts will now give them consideration and weigh them in the balance when dealing with a divorce, which puts you in a far better position than not having one. However it is important to ensure that they are correctly drawn up and both parties are advised. Our family law department has specialists who can assist you with this.
It is vital when thinking about business structure for IHT purposes, shareholder or partnership agreements and pre or post-nuptial agreements to keep those all under review. If you own a business and do not have them it is sensible to get advice on them now. But even if you already have them you should review them with a solicitor regularly because circumstances change and there are time limits relating to taxation matters which should trigger a review.
Unfortunately this guide cannot give a comprehensive overview of these complex legal areas. It is intended to suggest areas that you may want to think about as a business owner and seek legal advice on. But it is not legal advice and should not be relied on as such. Personal circumstances will dictate how the law is applied to you and you should contact us if you would like us to help you.