If you are married and own a business, it is very common for the business-owing spouse to leave their whole estate, including their interest in the business, to their spouse on death. At that stage, there will then be no inheritance tax to pay, because of the spouse exemption from inheritance tax. This exemption means that spouses or civil partners can leave as much as they like to one another on death, completely free of inheritance tax. However, in that situation an opportunity to save inheritance tax on your business by capturing business property relief may be lost.
Business property relief from inheritance tax is usually available at 100% on a business or an interest in a business, and on shares in an unlisted company. It is also available at 50% on a controlling holding in a listed company, and on land, buildings and machinery used in the business. However, the relief doesn’t apply if the main activity of the business is making or holding investments such as a ‘buy to let’ portfolio.
Business property relief is not always available to a widow or widower who has inherited a business from their spouse, by the time of the second death. This may be because the surviving spouse does not want to run the business or was not suitably qualified to do so, and so they may end up selling the business after the death of the business owner. Alternatively, a business partner may want to buy out the spouse, or the spouse may run the business for a time and then decide to retire. Failure to capture business property relief on a valuable business asset can mean that there will be a far greater 40% inheritance tax bill on the second death.
A solution to this problem is for the business owner to make a Will leaving their property which qualifies for business property relief to a discretionary trust on the first death, instead of leaving everything to the surviving spouse. This can combat the problem of the business being sold or ceasing to qualify for relief between the first and second deaths. It also forces HMRC to rule on the availability or otherwise business property relief at the time of the first death.
The discretionary Will trust will then receive the business rather than the surviving spouse. The beneficiaries of the trust are usually the surviving spouse and the business owner’s children or other chosen beneficiaries. The business owner will leave a letter of wishes to be read alongside their Will, often setting out that the surviving spouse should be treated as a main beneficiary of the trust during their lifetime, and that on their death the trust assets can be distributed to the couple’s children or other chosen beneficiaries. Alternatively, the trustees can continue to run the trust if there is a need to protect the assets for one of the beneficiaries in the longer term.
Chiltern Wills is a Will writing business based in Beaconsfield and run by former London solicitor Rebecca D’Arcy. Call us on 01494 708688 or email firstname.lastname@example.org for a free initial discussion about how we can help you with Wills, powers of attorney or probate.