Your options for Inheritance Tax planning

  •  November 7, 2023
     10:00 am - 11:00 am

With a tax rate of 40% on assets passed on after death, proactive planning enables you to pass on more of your wealth to the next generation. Join this webinar to understand how to optimise your estate and minimise your tax liabilities. The webinar will be led by members of our Private Client team and (more…)

Inheritance Tax: Business Property Relief

What is Business Property Relief?

A relief, known as Business Property Relief (BPR), reduces the value of the ‘relevant business property’ in the case of an IHT chargeable event, such as death, or the lifetime transfer of assets to a trust. Relevant business property includes:

  1. A sole trade business or a partnership share
  2. Shares in an unlisted trading company
  3. Shares in a quoted trading company where the owner has voting control of more than 50%
  4. Land, buildings, or plant and machinery owned by an individual and used by a partnership or company the individual controls.

The rate of relief that will be given is 100% for assets within classes 1 and 2 above, whereas assets within classes 3 and 4 will receive relief at 50%. Shares on the Alternative Investment Market (AIM) are treated as unlisted shares for BPR purposes, and relief is therefore available at 100%.

BPR conditions

What makes the relief so beneficial is that there is no monetary limit. Whilst BPR can be a hugely valuable relief for business owners, it can also be very easy to trip up on, due to the conditions that need to be met to qualify for the relief.

The individual must have owned the asset for at least two years at the point of the chargeable event and it must not be subject to a binding contract for sale. BPR will be restricted if the company holds ‘excepted assets’. Excepted assets are assets that are neither used for business purposes, in the two years preceding the transfer, nor required for future use in the business. An example of this would be large cash deposits which are not required for future use in the trade.

BPR will not be available if the business activity consists wholly or mainly of dealing in securities, stocks or shares, land or buildings, or making or holding investments. HMRC will look at all aspects of the business to determine if it is trading or investment, such as the business’ main activities, the assets and the sources of income. It is therefore critical for a business owner to ensure that the activities of the business comply with the conditions for relief.

HMRC will generally class ‘land-based’ businesses as investment businesses. One exception is property development businesses. The activity of dealing in land is not currently treated as relevant business property. However, a property development business constructing houses or other properties for resale should qualify for BPR.

BPR and trusts

BPR is also effective when settling relevant business property into a trust. The transfer into a trust will benefit from 100% relief (unless it is shares in a quoted trading company which carries 50% relief) and there would be no IHT charge on the way in. Similarly, the relief applies on distributions of business assets from the trust to beneficiaries once they have been held in the trust for at least two years. What makes transferring relevant business property into a trust more tax efficient, is that the donor can elect to claim gift holdover relief, which prevents the donor from suffering an immediate CGT charge on the deemed disposal of shares. The trust inherits the donor’s book cost of the shares and is then chargeable to CGT, when the trust eventually disposes of the assets. Settling business interests in a trust can be helpful with estate planning to pass on the benefit of the assets without relinquishing control.

There are many IHT planning opportunities available which involve business interests, and the potential benefits should not be overlooked. Please get in contact with the Private Client & Trusts team, or your usual haysmacintyre contact, for more information on how we can help.


Estate planning and Inheritance Tax

Things to consider for estate planning

We have set out some key points to consider when planning your estate:

  1. Have you written a will?
  2. Who will carry out your instructions?
  3. Do you want a funeral, cremation or memorial service?
  4. Who will look after your children (or your pets)?
  5. Are you aware that there is no such thing as a common law spouse for Inheritance Tax purposes?
  6. Marriage invalidates a will, but what about divorce?
  7. Are you regularly reviewing your will for any changes?

Writing your will

The best way to make sure your assets end up where you want them, is to write a will. While it is possible to write one yourself (and arrange for two independent people to witness your signature), we would always recommend using a solicitor, to ensure it is legally valid, and achieves your wishes.

Your executors are responsible for collecting your assets, paying your debts, and distributing your estate to your beneficiaries. Choose people who you trust will carry out your instructions. One of their first acts is to arrange your funeral or cremation, so including your wishes in your will is very important.

If you have young children, and both you and your spouse pass away at the same time, you should include instructions in your will for who will act as their guardian. The same could apply to any beloved pets.

What happens if there is no will?

Passing away without a will is called dying ‘intestate’. The law provides for the distribution of assets, with strict rules on who gets how much. Remember, there is no such thing as a common law spouse for inheritance rules, so an unmarried partner may not receive anything if you die without leaving a will.  It is therefore arguably more important for unmarried couples to write a will.

Once you have written your will, it is important to review it regularly to make sure it is still appropriate to your circumstances. Your will becomes invalid if you subsequently get married – this is therefore a good opportunity to review your plans. Getting divorced does not invalidate a will, but the divorced spouse is removed from benefitting from the will and from their position as an executor, if appropriate.

If you would like to us to review your will or to discuss any aspect of planning your estate, please contact Mark Pattenden, Partner.

Environmental Land Management and Inheritance Tax relief

Under the new ELM schemes, farmers and landowners are rewarded for farming in a sustainable way, under the Sustainable Farming Incentive (SFI). They can also be paid to support local nature recovery and the restoration of habitats, and large-scale tree planting.

Whilst farming land in an environmentally sustainable way should continue to attract 100% Agricultural Property Relief (APR) for Inheritance Tax (IHT) purposes, there is a concern that where land is taken out of agricultural production for the recovery of plants, wildlife and habitat protection, the qualifying conditions for claiming APR will not be met. Under current legislation, where land has not been owned and occupied for agricultural purposes immediately before it is transferred, relief is not available. Whilst farmers and landowners may, in certain circumstances, still qualify for Business Property Relief, the inability to claim APR could be a real barrier for farmers and landowners making long term commitments to take land out of agricultural production.

The Government has listened to concerns and has published a consultation document entitled ‘Taxation of environmental land management and ecosystem service markets’. The consultation is a call for evidence on how the tax system can better encourage private investment in ecosystem service markets (production and sale of carbon credits and biodiversity units), and a call for evidence to support a reform of APR, to include relief for land managed for environmental purposes under an environmental scheme.

The Government has made it clear that any reforms of APR will not benefit from land that did not previously qualify for relief. This could be an issue for farmers who have already diversified away from agricultural land use.

The Government’s review is welcome, as there has to date been little guidance from HMRC on the tax implications that the increasing number of environmental schemes can have, for farmers and landowners. In light of the Government’s ambition for net zero by 2050, we expect to see the introduction of further sustainability tax measures that encourage farmers and landowners to not only produce the food we need, but also to protect and enhance our natural environment.

If you have any questions regarding APR and the potential reforms, please get in touch with Kay Mind, Director. The consultation closes shortly, and we will provide further commentary when the Government publishes the results.

This article has been taken from our Private Client Summer Briefing 2023. Click here to read more.

Inheritance Tax: Charitable donations

An often-overlooked subject in relation to tax is the relief available on qualifying charitable Gift Aid donations. Gift Aid payments are made net of 20% basic rate tax. If you wish for a charity to receive a total of £1,000, a physical payment of £800 is required. The charity will then claim back the £200 from HMRC. For basic rate taxpayers, no further adjustment is required, however for higher and additional rate taxpayers, an adjustment is required via the tax return. The tax relief is obtained via the extension of the basic rate band, by the gross charitable donation made, meaning more income is subject to tax at the lower rates.

Any charitable donations made in the current tax year prior to the submission of your tax return can also be carried back to the previous year to accelerate any tax relief. This can be particularly beneficial as there is an interaction between Gift Aid payments and the calculation of your Personal Allowance (your personal allowance tapers by £1 for every £2 you earn over £100,000). For example, an individual with a gross income of £101,000 could make a £800 (net) charitable donation and carry this back. This would mean that they have a reinstated Personal Allowance and have reduced their tax liability by £400. The net cost to the taxpayer would be £400 (£800 cost less £400 saving), however, the charity would benefit from the £1,000 donation (£800 paid plus £200 from HMRC).

In addition to Gift Aid donations, individuals can give shares in quoted companies on a recognised stock exchange to a charity. The gross value of the shares, on the date of the gift, is treated as a deductible payment for Income Tax purposes. No further adjustments are required to the tax computation, or the tax rate bands as above. A gift of shares worth £800 would result in an Income Tax saving of £480, meaning a net cost of £320 to the individual. Please note, in this case the charity would not receive the additional £200 as no ‘Gift Aid’ can be claimed from HMRC on an outright gift. This can be especially useful if you have an asset which, if disposed of on an open market, would result in a CGT liability. When making a transfer of assets to a charity, it is not a taxable event for CGT purposes, increasing any further tax savings.

Budget 2023 included an update to the tax relief on EEA/EU charitable donations. Previously, donations to charities located in the EEA/ EU would qualify for Gift Aid, following the principles explained above. However, to obtain tax relief on donations made after 15 March 2023 (subject to a very few charities which have asserted their UK charitable status), it will be restricted to UK charities only. This change is not just relevant for Income Tax purposes but could also affect your Inheritance Tax (IHT) exposure. If you have any specific donations in your will to overseas charities, please contact Duncan Cleary, or our Private Client team, to ensure that the charity (or charities) will qualify for IHT relief under the new definition.

This article has been taken from our Private Client Summer Briefing 2023. Click here to read more.

Record Inheritance Tax receipts in 2023

The Government’s decision to freeze the IHT threshold has led to more families being dragged into the IHT net. The IHT threshold of £325,000 has not increased since 2009, while the average UK house price increased by more than 80% between 2009 and early 2023. The announcement in the 2022 Autumn Statement to freeze the IHT threshold until April 2028, will see the Government collect billions in extra tax that would not be possible if the nil rate band had increased with inflation.

While there have been calls for the abolition of IHT, it is unlikely that the Treasury would be willing to forfeit £7bn a year in receipts, which helps to fund our public services, without a viable alternative. We may see some IHT reforms, but scrapping the tax altogether would leave a sizeable hole in the Treasury budget, presumably needing to be filled by increases in other taxes.

In our opinion, given the current state of the UK economy, IHT is here to stay. Therefore, lifetime planning remains key if you wish to minimise the tax you pay to the Treasury and maximise the family wealth you pass on to the next generation.

IHT planning can include lifetime giving, charitable giving, gifting surplus income or setting up a family trust or investment company. Maximising IHT allowances and reliefs also plays a part in reducing your exposure.

Our IHT specialists are on hand to assist you with your estate planning and provide you with bespoke solutions to minimise your potential IHT exposure.

For a full list of our IHT planning services, please download our factsheet here and contact Kay Mind, Director, for any further assistance.

Family investment company: pros and cons

An FIC is a private company, either limited or unlimited, where the shareholders are family members who typically hold different classes of shares. The parents will typically hold voting shares while the children would be issued non-voting shares with rights to receive dividends. The governing articles can be tailored to suit the specific needs of the family and cover the distribution of company profits, the return of capital, the transfer of shares and the appointment of directors.

The directors (usually the parents) will have the day-to-day control of the company and make relevant investment decisions.

In addition to facilitating the transfer of wealth to the next generation, the FIC can, if managed efficiently, reduce the family’s overall tax burden.

Benefits of an FIC

An FIC can be set up by transferring cash or assets into the company. The initial transfer of assets into an FIC is not subject to an Inheritance Tax (IHT) entry charge of 20% if the cash/assets exceed the nil rate band of £325,000. This makes the FIC more attractive to families than the traditional trust which limits the funds that can be settled free of IHT. Also, unlike a trust, there are no IHT 10-year charges or exit charges if and when capital is distributed.

The transfer by the parents of cash/assets into an FIC and the subsequent issue/gift of shares to the children can remove value from the parents’ estates and thus reduce the IHT exposure on their deaths. The gift of shares to the children will not be subject to IHT, provided that the parents remain alive for seven years from the date of the gift.

The profits of the FIC are charged to Corporation Tax (currently 19% but increasing to 25% from 1 April 2023), which is lower than the rates of Income Tax and Capital Gains Tax (CGT) for individuals. Holding investments through an FIC rather than personally can result in significant tax savings for the family.

The value of the FIC shares held by the shareholders can be discounted for IHT purposes because they usually hold a minority interest in the company. This can result in a significant IHT saving on the death of a minority shareholder.

Disadvantages of an FIC

An FIC can be tax inefficient if all of the company profits are paid out to the family as this creates the potential for double taxation. The company pays Corporation Tax on its profits and then the shareholders will pay Income Tax when profits are distributed in the form of a dividend. The FIC is therefore more tax efficient if the profits are retained in the company.

If assets rather than cash are transferred into the FIC, this may trigger a CGT charge, and if property is transferred, this could trigger a Stamp Duty Land Tax charge. A transfer of cash is by far the best option to minimise the family’s tax exposure.

The set-up costs and ongoing administration, such as completing annual accounts and Corporation Tax returns, can make an FIC unattractive and therefore, the FIC is recommended for initial investments in excess of £1 million.

An FIC will not be suitable for all families but if you wish to discuss how a family company could benefit you and your family please speak to Kay Mind, Director, or your usual contact at haysmacintyre.

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