Inheriting the family business can both be a blessing and a challenge at the same time. On the one hand, it’s an opportunity to carry forward your family’s legacy, benefitting from an already established customer base, brand reputation, and maybe even an experienced team that knows the business. On the other hand, you open yourself up to the complex world of inheritance tax (IHT), which can significantly impact the value of what you receive.
To help you, we’ve put together this guide to inheritance tax and family businesses so you can have the best chance possible when you start out.
Inheritance tax: the basics
IHT is a levy applied to a deceased individual’s estate before it is distributed to their beneficiaries (the people nominated by the deceased individual to receive something from the estate). An estate is made up of everything someone owns, including property, possessions, and cash. Therefore, an inherited business may attract an IHT charge.
IHT is charged at 40% on the value of an estate that exceeds the threshold of £325,000. There is also a £175,000 allowance specifically for homes.
While inheritance tax applies to various assets, including property, investments, and personal possessions, there are specific reliefs available for businesses that can significantly reduce the tax burden.
Business relief and exemptions
Fortunately, the government recognises the unique challenges that IHT puts onto family businesses, offering business relief as a result. This relief can reduce the value of a business or its assets by up to 100% for IHT purposes. In other words, it deducts the value of the business and its assets from the owner’s estate, resulting in no or reduced IHT due.
There are two main caveats: business relief applies to the business and its owners only if they have been owned for at least two years before the owner’s death. The other is that there are two different levels of business relief:
- 100% relief: This applies to a business or an interest in a business, as well as shares in an unlisted company.
- 50% relief: This applies to shares controlling more than 50% of the voting rights in a listed company, land, buildings, or machinery owned by the deceased and used in a business they controlled or were a partner in.
How can you reduce IHT due on a family business?
If you’re due to inherit a business, there’s not a lot you can do to reduce any IHT you may have to pay outside of applying for business relief. There are, however, actions the business owner can take, and the earlier they start, the more they can pass down to you.
There are two main strategies to consider:
- Early gift transfers: Transferring business shares as gifts before death can reduce the value of a taxable estate. However, if the estate holder passes away within seven years after gifting shares, IHT may stay be due albeit at a lower rate than 40%.
- Trusts: If shares qualify for business relief, they can be placed into a trust without the usual upfront 20% IHT charge. When the business is sold later, the proceeds don’t face IHT—but they do face charges of up to 6% on the trust value every ten years.
The power of professional advice
Reducing IHT on a family business requires careful planning and proactive steps taken well in advance. That’s why it’s so important to get professional advice from someone with expertise in family businesses and IHT. Like HW Associates.
If you need assistance with your legacy planning, get in touch with us. here to guide you through the process, providing comprehensive advice and support to secure the future of your family business.