When it comes to planning for the future, ensuring that your business can be passed on to the next generation without incurring large Inheritance Tax (IHT) liabilities is critical. Under the Inheritance Tax Act 1984, Business Relief (BR) offers valuable exemptions that reduce the taxable value of a business or business assets, making inheritance planning much more manageable for families and business owners alike.
What Qualifies for Business Relief?
Business Relief applies to specific types of businesses and business assets, and the relief can be either 100% or 50%, depending on the nature of the assets. To qualify for 100% Business Relief, the business must be a trading business. The following assets may qualify for BR:
- A sole trader business or a partnership interest in a trading business.
- Shares in an unlisted company (including AIM-listed companies).
- Land, buildings, or machinery owned by a partner or controlling shareholder that is used wholly or mainly for business purposes.
If a business has been owned for at least two years prior to the owner’s death, these assets may be exempt from inheritance tax, either fully or partially, depending on the circumstances.
Non-Qualifying Businesses and Excepted Assets
While Business Relief offers substantial benefits, not all businesses qualify. Businesses or companies whose primary purpose is to generate investment income, such as investment properties or stocks and shares, do not qualify for relief. This also includes:
- Businesses that are non-trading or predominantly investment companies.
- Businesses that are being wound up or sold at the time of death (subject to exceptions).
Furthermore, even within qualifying businesses, certain assets are excluded from BR. These are called excepted assets, and they include:
- Assets not used mainly for business purposes within the last two years.
- Investments or properties that are not actively involved in the company’s trade, for example, surplus cash or properties held for personal use rather than business operations.
The Impact of Business Relief on Inheritance Tax: An Example
To illustrate the importance of Business Relief, consider the following example:
John owns an engineering firm valued at £1 million. His estate, including his business, totals £1.5 million, which would typically attract a 40% IHT charge over the £325,000 threshold. Without Business Relief, his family would face a £470,000 tax bill on his business assets (£1.175 million taxable).
However, because John’s business qualifies for 100% Business Relief, the value of the business is exempt from IHT. His taxable estate is now reduced to £500,000, which means the inheritance tax payable drops significantly to £70,000, a huge saving compared to what the bill would have been.
Speak with a Wills, Trusts and Estates Solicitor
Business Relief offers a crucial opportunity to mitigate the impact of Inheritance Tax on your estate. Whether you’re a business owner looking to pass your legacy on or a family member navigating inheritance planning, expert advice is essential.
To learn more about how Business Relief can benefit you, visit our Wills, Trusts and Estates page. If you’re ready to discuss your specific needs, contact Heather Lally, our dedicated Trusts and Estates specialist, at 01244 354822 or via email at heather.lally@dtmlegal.com.
