It is very easy to ignore, or to delay, putting in place suitable provisions to ensure that maximum value can be passed on to your heirs when you are no longer able to run the business.
One very important point to check is that your interest in the business will qualify for business property relief (BPR) from inheritance tax. Your business may have begun life very clearly as a trading company, and so you may have been led to believe that BPR will be fully available, enabling you to pass on your shares to your beneficiaries free of IHT. However, it is common for the nature or structure of a business to alter over time.
Suppose, for example, that when you had surplus cash in the business some years ago you bought a series of properties that have been let and have generated a very attractive rate of return over the years. It may even be that you have focused more on the property side of things recently as trading conditions for your business have become much tougher.
For your shares to qualify for BPR your company must be wholly or mainly a trading entity. So, if the pendulum has swung too far towards investment properties HMRC may, on your death, want to tax the entire value of your shares at 40 per cent, including that attributable to the trading elements.
If you are married then you may have a straightforward will leaving everything to your spouse if you die first. There is nothing wrong with that – or is there? It does have the advantage of simplicity, but you run the risk of wasting the IHT relief. Everything you leave to your spouse is exempt from IHT anyway assuming that you are both domiciled in the UK. So, by leaving your relieved shares to your spouse you waste the relief.
Suppose your spouse then sells the shares, the cash sale proceeds will be fully chargeable to IHT and so your children will bear IHT at 40 per cent on your spouse’s subsequent death on value which you could have passed on at no cost.
Including a specific gift in your will to pass your shares to a discretionary trust for your spouse, and your children can have the best of both worlds – your estate can claim the BPR and your spouse can still benefit from the shares themselves or from the proceeds of their sale. If the shares have been sold then their cash value should be ring-fenced from any charge to IHT on your spouse’s death.
