If you are the owner of a small business that has its own valuable business assets, you need to know that your estate will receive different treatment from ordinary personal property on your passing. As you know, the IHT threshold for personal property is at 40% for amounts above £325,000 a person.
Any business, on the other hand, will get some cuts on the taxation because the government recognizes its role in enhancing economic growth within the country. The business then qualifies to receive Business Property Relief (BPR).
According to the provisions of the rules of BPR:
- Sole proprietorships and partnership interests are 100% exempted from paying IHT. This provision can also be applied to shares in trading companies, provided those shares have not been listed on any recognized stock exchange.
- BPR is applicable as above, with no limit to the value for which claims can be raised.
- Business shares listed on the Alternative Investment Market are also fully eligible to claim 100% BPR.
- A 50% BPR applies to land and buildings and plants and machinery acquired for use related to the business requirements.
How BPR works
In order to benefit the most from your entrepreneurial venture and ensure that your family gets the most out of your labor, you should consider the following to ensure that your business qualified to claim BPR if you pass away:
- Any business assets should have been in the donor’s possession for a minimum of two years. In addition, the business for which a BPR claim is raised should be majorly or wholly a trading company.
- Holding companies, investment companies, brokerages or any other form of business dealing in stocks, securities, shares, bonds, buildings or lands are not eligible to claim BPR.
- The law is especially lenient for family-owned trading companies and small family entrepreneurs. More often than not, businesses of this sort qualify and get BPR and therefore pay the least in IHT taxes.
Writing your will
It is important to seek expert legal and financial advice when conducting IHT planning and writing out a will for your small business and other assets that it owns. This is truer if ownership and operation of the business is within the family.
You should also write it in a fair way for your rightful beneficiaries and according to the articles of association or other legal statutes binding your conduct as a small business full or partial owner. If this does not happen, there are grounds on which a beneficiary can dispute a will that they feel was drawn up with prejudice. Here are some useful tips:
- If you have assets that are IHT-exempt, you may want to choose a beneficiary that is a trust, or anyone other than the spouse or civil union partner.
- You make no IHT savings by passing assets to beneficiaries who are not eligible to pay IHT such as spouses. For instance, if you transfer assets that qualify to receive BPR to a spouse, then you will not make any savings since you were not going to pay IHT in the first place.
- BPR cannotapply if there is a binding contract requiring selling of a dead partner’s shares by the surviving partners within a small business. However, even if the shares do not qualify, they can still benefit from the annual IHT tax allowance of £3,000.
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