Protecting Your Business Assets
Does your business need to go in your Will?
Protect its value post death for you family & employees
Maintain reliefs from Inheritance Tax for your business
Ensure that your spouse gets what it is worth
How do I pass on the family business?
Succession planning is no less important where there is a family business.
The business will have helped create the wealth your family has lived off and benefited from over the years, so your desire to protect it and pass it on will be particularly strong.
Running your own business is stressful enough these days without wondering who would run it if you suddenly departed this World or couldn’t manage it anymore. If you haven’t experienced this kind of trauma, you can count your blessings, the chances are that you probably won’t give it the time of day it deserves, but it will still be in the back of your mind telling you that you should do something about it.
If your business is eligible for Inheritance Tax relief, you really should consider passing it on through a Discretionary Trust set up by your Will, otherwise it could cost you or your family dearly in the future.
Looking at it another way…
Running your own business means hard work and dedication so it is important that you consider a strategy to preserve your interest in it for your family should either you or a business partner suddenly die or be diagnosed terminally ill.
It is possible to get 100% Business Property Relief (BPR) against Inheritance Tax on qualifying business assets, the trouble is, are all of your business assets going to qualify? Where assets are deemed not to be employed in the business activity they will be excluded from BPR.
Without the right plans in place your spouse/partner and children may not inherit your share of the business. If they do take over the running of the business without any prior experience the value of the business could depreciate and being worth less when it is eventually sold, and the proceeds could be liable to Inheritance Tax. A business partner may not be able to buy out the deceased’s share. Good enough reason then for a plan.
The executors and trustees appointed in your Will are empowered to wind up and distribute your estate so it is sensible to appoint business trustees to run your business to ensure some continuity in the interim period up to its sale or transfer. Don’t forget that your business supports your family and all those involved in it like employees and sub contractors.
A partnership agreement or company’s Memorandum & Articles of Association will govern the sale/transfer. Pre-emption rights usually offer the deceased’s shares to the other shareholders for sale on a pro rata basis for a short period of (say) 30 days to agree the purchase. Valuation is always a tricky one to overcome, however if there is a ‘Cross Option Agreement’ in place backed up by a life assurance payout, the values will have already been predetermined so the surviving spouse will simply be able to swap the company shares for the payout. To future proof against Inheritance Tax (and other issues) it is advisable for the deceased to leave his shares into a Discretionary Trust written into his Will. Then the Trust’s beneficiaries will have tax efficient access to the trust fund going forwards. If this is done there is nothing more to go in the client’s Will regarding the business.
Without a cross option agreement and life cover in place, the shares will still be offered for sale but without the funding. If no sale takes place the deceased’s shares will form part of the deceased’s estate residue and be distributed that way via a Will or Intestacy. The other shareholders could then be disappointed to find out who the new business owners are.
The life cover payout used to buy the deceased’s business share will also be written under trust so that these proceeds do not impact on the surviving individual estates.
The Actuaries life table below illustrates the real risk to the business of a partner or shareholder dying:
Top 10 Inheritance Tax Tips
- The Annual Exemption – you can give away £3,000 each year, so a couple can give away twice this amount. If you don’t use this allowance one year, you can use it in the next year.
- Gift Assets to your Children – these are known as ‘potentially exempt transfers’ (PET’s) and provided you survive 7 years then the job is done. Who should make the gift? Will you lose control of the asset that you’ve gifted? Well, you can protect the gift in the hands of the recipient so you don’t need to lose total control of it.
- Gift part of your house to your children – after 7 years it is out of your estate for IHT. The trouble is you have to pay full market rent to your children. They in turn have to pay income tax on the rent received. If they sell it they will be liable for Capital Gains Tax (CGT) on the gain on their share, and if you get it slightly wrong the gift will fail entirely. The better solution is for one spouse to sell their half share of the house to the other spouse in exchange for an IOU, which is then gifted to the children as a 7 year PET. After 7 years, half the ‘value of the house’ is out of the estate for IHT, but the married couple still owns the entire house.
- IOU Scheme – as tip no. 3 above but it can be done with any asset, e.g. a share portfolio, second property and so on. When set up properly, the value of the asset will be taken out of the estate after 7 years.
- Deed of Variation (DoV) – say a relative dies and leaves you an inheritance that creates you an IHT liability. Use the DoV procedure to vary that Will after death and set up a Trust to receive the inheritance for the benefit of you, and your family. There are time limits but this works very well if set up correctly.
- Gift out of regular income – if you have an IHT estate and your income is higher than your expenditure, the problem will only get worse as time goes by. Gifting the excess out of regular income to your children is immediately exempt from IHT. The rules can be tricky to implement but this is a very significant exemption if used correctly.
- Business Property Relief (BPR) Scheme – if you hold investment assets in a BPR scheme for only 2 years they will be 100% exempt from IHT. You need to retain these assets until you die but you can get an income and, since you have not given these assets away, you can cash them in at any time if you need to.
- Settlor Excluded Trust – if you want to gift an asset to your children to avoid your IHT after 7 years, but the asset has gone up in value (like a house) and would trigger a CGT liability if you sell it, you could instead set up a Settlor Excluded Trust and transfer the asset to that trust. As you are the Settlor and a trustee you therefore retain control of the asset, but as you will have no benefit from it, given 7 years it will be out of your estate for IHT and you will get holdover relief for CGT as well.
- Discounted Gift Trust – can seem attractive and you can get an immediate IHT exemption for part of your initial investment. The trouble is the portion that is exempt is based on your age and health so it may not be as great as you had wished for.
- Family Protection Trusts (FPT’s) – avoid the problem in the first place. If inheriting from your parents is going to give you an IHT problem, get them to set up FPT’s because with their assets ‘in trust’ you will have the option of borrowing your inheritance from the trust in exchange for a valid IOU so that you get the full benefit of the inheritance without incurring an IHT liability.
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