11/08/2020

8 mins

John Spink Head of Financial Planning at Drewberry
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%.

I’ve Already Sold My Business — Can I Still Plan for Inheritance Tax?

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.

Gifting and Inheritance Tax

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.

They both take a full 7 years from the date they are made to fall outside of your estate for IHT purposes.
They can both result in the loss of full control and future access to the amounts gifted.
It may be advisable to limit them to £325,000 in each seven-year period to avoid further tax complications.

Investments That Attract Business Property Relief

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.

Replacement Property Relief

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:

Qualifying Business (Held for a minimum of 2 years ownership)
Business Sale Releasing £1.2 Million in Cash
£1,200,000	£1,200,000
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

*Assuming other personal assets utilise available nil-rate bands

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.

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