by Jonathan Cooper
Head of Paraplanning
The best time to undertake Inheritance Tax (IHT) planning in relation to business assets is before their disposal. However, there are many reasons, personal and professional, where the business needs to be sold and appropriate plans cannot be implemented prior to the sale.
This can lead to a significant uplift to the value of your personal estate which, unless it is spent rather quickly, could be subject to an IHT charge at 40%.
The good news is that this situation is not necessarily a fait accompli when it comes to IHT planning.
There remains options and means to reduce the potential tax burden if the sale of business assets has increased the value of your IHT taxable estate and you are concerned about the implications for your loved ones and chosen beneficiaries.
One should always look at using their personal tax allowances and in relation to IHT the most obvious is the £3,000 annual gift exemption; but this is rather small beer when it comes to the sale of a business which could net 6 or 7 figure sums, if not more, in your bank account.
Another traditional method of IHT planning is larger gifts. Where these are made to an individual, they are called Potentially Exempt Transfer and where made to most Trusts are known as Chargeable Lifetime Transfers.
Despite their differing monikers they both have few potential drawbacks in common.
One alternative solution is the use of Business Property Relief investments.
Such qualifying investments are, through longstanding and established Business Relief tax legislation, taxed at a rate of 0% for IHT once they have been held for a 2-year qualifying period and where they are held at date of death.
As they are an investment in your own name, and not a gift, they remain under your control and as such access to income and capital can still be gained should this be needed.
Sums from business disposals can therefore be reinvested into Business Property Relief investments to gain IHT relief at a rate of 40% after just two years.
However, it could be better than that.
Importantly for our business owner who has recently sold their business, there is another piece of legislation known as Replacement Property Relief.
This states that if all or some of the proceeds from one BPR qualifying assets are invested back into another BRP qualifying asset within 3 years, then the newly acquired BPR qualifying asset should be immediately exempt from IHT and does not have to go through another 2 year holding period to gain the 0% IHT tax rate.
If, therefore, it can be established that the sold business was BPR qualifying whilst it was trading (or before the shares were sold), then IHT can be immediately mitigated on the sale proceeds.
Let us consider an example:
Business Sale Releasing £1.2 Million in Cash
Proceeds reinvested into BPR investment within 3 years of business sale
Proceeds from business sale retained as cash
Potential immediate IHT saving of £480,000
Potential IHT chargeable at 40%*: £480,000 tax due
Please note that Business Relief Investments should be considered high risk and the availability of tax reliefs highlighted will dependent on your own personal tax situation.
There is no substitute for personal advice. The needs of you, your family and your company are all unique and requires a bespoke and tailored solution. To get started on that journey, the team here at Drewberry would be more than happy to help.
We started Drewberry because we were tired of being treated like a number. We want to give you as our client the service you deserve when discussing matters as important as planning your financial future.
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