Death is the last thing people like to think about however, as everyone knows it is one certainty in life that we can’t simply ignore. As a business owner life is very hectic and it is understandable that consideration for what happens after you’re no longer around isn’t at the top of your list. However, what would happen to your business and your dependants if something was to happen to you tomorrow?
Careful and thorough planning should be taken when considering the future of any shareholding in a private trading company. I am going to detail some elements which need some serious consideration – some you may have thought of already – but others not.
Business Property Relief
Before you decide where you would want your shareholding of your business to go, in the event of your death, consideration should be given to the potential inheritance tax implications.
Inheritance Tax is a charge against your estate, mainly on death. Currently, the first £325,000 of your estate is taxed at 0%, this is commonly called the ‘nil rate band’. The value of your estate above £325,000 would be taxed at 40%. There are various exemptions and reliefs available to reduce your inheritance tax liability, one of which is Business Property Relief (BPR).
As a business owner, BPR is a relief which is too valuable to waste. Unquoted shares (but not securities) in a company could potentially qualify for 100% relief from Inheritance Tax, effectively meaning total exemption. The relief is only applicable after two years of ownership and is only available to trading businesses. Also, no relief is given to a business which consists wholly or mainly of dealing in securities, stocks or shares, land or buildings or making or holding investments.
I, along with many private client solicitors, would highly recommend that you deal with any business shareholdings specifically within your Will. You will need to think carefully as to who you would like to gift the shareholdings to, in order to take full advantage of BPR.
You should avoid making a specific gift of the business shareholdings to your spouse. A spouse is an exempt beneficiary for inheritance tax purposes. Any gift of the shares to an exempt beneficiary will waste any potential BPR. You should also be careful if assets qualifying for BPR fall into your residuary estate and all or part of the residuary estate passes to an exempt beneficiary.
Likewise you also need to be cautious if you leave a specific gift to a non-exempt beneficiary of property which then does not qualify for the relief. In some cases this can result in the BPR being wasted or even cause your Inheritance Tax liability to increase.
You may consider gifting the shareholdings to your children, however, in some cases this might not be a sensible solution as the children could be too young or there are a number of children and for practical reasons this would not be suitable.
Taking into account the above, it is difficult to decide who to gift the shareholding to. An effective solution could be to gift the shareholding into a Discretionary Trust.
A Discretionary Trust is a flexible Trust whereby no beneficiary has an automatic right to the capital or income. You would name a pool of beneficiaries and the Trustees have the discretion to decide who from those named should receive capital and/or income from the Trust. It is normal practice to place a letter of wishes alongside the Will expressing your intentions and providing guidance. The Trustees are not bound by the letter of wishes but it will assist them with making decisions.
Placing assets, such as unquoted shares, which qualify for BPR into a Discretionary Trust provides a number of advantages:
- A surviving spouse can be a beneficiary ensuring that they are sufficiently provided for and not cut out.
- HMRC will not consider whether BPR assets qualify for relief unless Inheritance Tax is at stake. They will therefore be encouraged to make a decision. If BPR assets were left outright to a spouse or civil partner HMRC would have no need to consider the relief. This can make future estate planning for the spouse difficult.
- If BPR is not available, the assets can be distributed to any surviving spouse or civil partner within 2 years in order to secure spousal exemption.
- If BPR is available, the assets can remain in trust and avoid on going Inheritance Tax charges.
- If it is intended that children or grandchildren will take over the business in the future but they are currently too young, a gift into a discretionary trust which includes them as beneficiaries allows decisions about business succession to be deferred.
Review your Will
If you have unquoted shares in a business we would recommend that you review your Will to ensure that these have been dealt with in the most appropriate and tax efficient manner. At the same time you should consider the businesses’ Articles of Association or Shareholder Agreement to ensure these reflect your intentions under your Will.
If you need some support in planning your Will and in deciding on who and how to gift your shareholding of your business – please comment below, give me a call on 01604 828 282, or feel free to email me for a private conversation or free initial consultation.