Managing and protecting your wealth: The business of a lasting legacy

If you own a business or an interest in a business, your estate could qualify for an Inheritance Tax (IHT) relief known as Business Property Relief (BPR) when you die.

BPR can be granted at 50% or 100% depending on the type of business you own.  

BPR will only be granted if you have owned the business or business asset for at least 2 years before you die. Therefore, if you die shortly after obtaining the asset, your estate will not qualify for the relief. There is an exception if you inherit an asset from your spouse and if the combined period of ownership exceeds 2 years.  

It is important to note that not all businesses can qualify for BPR. If the business mainly deals with securities, stock, land or buildings or in the making or holding of investments, it will not qualify for BPR. For example, a buy-to-let business is considered purely an investment and as such will not qualify for BPR.    

Creating a BPR Trust

If you plan to leave your business or business assets to your spouse when you die, you should consider setting up a BPR Trust. This can be done either during your lifetime or through your Will.  

If a business or business asset if left to a spouse upon first death, there will be no IHT to pay because it is spouse exempt. However, BPR Trusts are valuable IHT planning tools for considering the position on the second death. There is a possibility that BPR will not be available by the time the second spouse dies including for example, if the spouse does not want to run the business and the business assets are sold during the second spouse’s lifetime. A BPR Trust is often used to save IHT in this scenario. If the business or business assets are owned by a BPR Trust and the business is subsequently sold, the sale proceeds will fall outside the spouse’s estate for IHT purposes. This is because the assets (or sale proceeds) belong to the BPR Trust, which is treated for tax purposes as a separate entity, and not the surviving spouse.  

Whether you are setting up a BPR Trust during your lifetime or incorporate one into your Will, you will need to carefully consider the appointment of your Trustees. Broadly, Trustees have wide powers to distribute assets to any of the named beneficiaries at any time or to retain them in Trust. To guide your Trustees, it is advisable to write a letter of wishes to accompany the Trust. The letter could direct the Trustees to wind up the Trust upon the second death and distribute the assets to the beneficiaries. Alternatively, it could instruct the Trustees to continue running the Trust if there is a need to protect the Trust assets for any vulnerable beneficiaries, such as in cases of divorce or bankruptcy.   

Below is an example of a death estate with BPR available and the same estate BUT the business has been sold. 

The estate with no BPR available could have been handled more tax efficiently during lifetime, by making use of a BPR Trust. Discussions could have been had around the crystallisation of any gains, or should any gain be held over into the Trust. 

Should the business continue or not, and you have successfully survived 7 years, you have protected your wealth from a future tax charge of 40%, if the business is sold. Once assets are in Trust, the assets enters into its own tax regime for IHT, referred to as the relevant property regime, whereby the Trust is assessed every 10 years for a periodic charge and any future exits are also assessed for IHT; but this is far cheaper than 40% tax and easily planned for with the right advice. 

Lifetime of the BPR Trust

The Trust has a perpetuity period of 125 years, which allows for the assets (shares, cash, investments etc) to remain outside of any individual’s estate for this length of time, which can run through several generations of the family and the capital value is not at risk of a 40% IHT charge every time a member of the family passes away, sometimes causing the same asset to be taxed twice. The Trust still has IHT considerations but only up to 6% every 10 years, along with any exits. 

From a wealth building perspective, you now have a separately controlled structure, with Trustees who have a fiduciary duty to the beneficiaries to defend, grow and appoint assets to the family. With the right Trustees (Professional or lay) and advisers, the Trust should work tax efficiently for the family. 

It is important to select an appropriate investment professional to invest any cash sums and the Trustees should make use of an investment policy statement to appropriately monitor and judge investment performance. The prudent governance of the Trust, ensures that you have appropriate checks and balances to ensure the Trust is running smoothly and effectively. 

Should the beneficiaries of the Trust show the same entrepreneurial spirit as the Trust settlor, the Trust can be used as a form of family bank. The Trust funds can be used to loan monies to the beneficiaries to start them up in business, with this loan having preferential low interest rates or non-interest bearing with the loan being paid back to the Trust. This further keeps the wealth protected and in the family for the perpetuity period. 

Whilst the origins of Business Relief legislation stem from the preservation of family-owned businesses, investment opportunities exist for those facing wider IHT challenges which make use of this same IHT exemption. Holding a qualifying investment for a period of 2 years can provide 100% Business Relief exemption for IHT purposes, meaning funds that may have otherwise attracted an IHT liability of 40% are effectively removed from the estate for IHT purposes, and importantly, without relinquishing access to the underlying capital. An appropriate BR investment solution can therefore form an important part of an overall IHT mitigation strategy, complimenting any existing trust framework. 

It is no small feat to build a successful business and the hard work put in to create a lasting legacy for the family should not go to waste.  

For advice to assist you with estate planning, including the use of Trusts for BPR or the management and administration of an existing Trust and assets within it, please contact us where our Trusts, legal and financial planning specialists will be pleased to discuss further. 

The content of this article is for information only and does not constitute formal financial advice. This material is for general information only and does not constitute investment, tax, legal or other forms of advice. You should not rely on this information to make, or refrain from making any decisions. Always obtain independent, professional advice for your own particular situation.