Business Relief

As time goes by, it's natural to start thinking about your legacy and how you can pass on your hard-earned assets to your loved ones. Inheritance tax (IHT) is a concern for many, but there are strategies available, such as Business Relief (BR), that can help you reduce the impact of IHT on your estate.

If you are wondering whether you may have an inheritance tax liability and may need to consider an estate planning solution please see our Guide to Inheritance Tax and Estate Planning and discuss with your financial adviser.

This guide is designed to provide you with an overview of Business Relief and how it can be a valuable tool for managing your inheritance tax liability.

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What is Business Relief?

Business Relief (BR) is an established relief from Inheritance Tax. By purchasing shares in a company that qualifies for Business Relief, you could potentially reduce your Inheritance Tax liability.

This is contingent on the type of business asset and how long you own the shares for. Shares in Business Relief qualifying companies, if held for a minimum of two years, and at time of death, should be eligible for 100% inheritance tax relief.

A brief history and functionality of Business Relief

Business Relief was introduced by the Government in 1976. The primary intention was to shield businesses from being sold or fragmented, following the death of the owner of the business to settle significant inheritance tax obligations — a situation that could be detrimental to local communities and the wider economy.

Business Relief legislation was expanded to cover private investors with shares in qualifying businesses, not just the owners or proprietors of the business. This inclusion served to encourage investments in UK businesses. Now you can be a minority owner shareholder in a business and benefit from Business Relief.

Types of Business Relief qualifying companies you could hold shares in

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Why would someone choose Business Relief as an IHT solution?

1. More control and access

• Unlike some Trust arrangements or gifting strategies, Business Relief investments generally offer greater liquidity, meaning you can access your funds if necessary.
• Liquidity can be important for managing unexpected expenses or changes in your financial situation. Many providers allow you to take regular distributions.

2. Faster tax benefits

• Business Relief can provide significant tax relief in a relatively short time frame. While assets in Trusts or those that are gifted typically take seven years to become fully exempt from Inheritance Tax (IHT), Business Relief-Qualifying investments can achieve this in just two years.
• This could be an attractive option for those that may have left estate planning late or who have a limited life expectancy.

3. Simple process

• Acquiring Business Relief-qualifying shares is generally straightforward. Many providers offer tailor-made solutions for investors seeking to utilise Business Relief for estate planning.

4. Potential for growth

• Investing in Business Relief qualifying companies often means investing in growth oriented businesses. There are a range of BR solutions available, some target higher potential capital growth, while others target capital preservation.

5. Supporting UK businesses

• By investing in Business Relief qualifying companies, you are directly supporting UK businesses, often these companies can be smaller or family-run enterprises.

• Investment strategies will often focus on businesses which seek to have a positive environmental or social impact; this can be especially satisfying for investors who wish to leave a positive legacy.

What are the risks?

• Capital at risk: The value of a BR-qualifying investment portfolio will depend on the performance of the underlying companies it invests in. You may get back less than you invest.

• The rules may change: Your tax treatment depends on your current circumstances, and this may change. Also, whether the investment qualifies for BR will depend on the portfolio companies maintaining their qualifying status.

• Shares could be volatile and less liquid: Shares in AIM-listed or non-listed entities might be more susceptible to market volatilities than those listed on the London Stock Exchange.

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Meet Theresa

Meet Teresa

Meet Theresa, 78, an investor looking to consider a Business Relief IHT solution in order to minimise the Inheritance Tax bill her children will face.

Theresa has a £150,000 share portfolio.

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What is the tax saving?

In this scenario, Theresa’s children save £60,000, which is the amount that would have been due in inheritance tax had Theresa’s original share portfolio formed part of her estate.

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How does Business Relief compare with other IHT solutions?

Business Relief should be viewed within the broader context of IHT planning, here are some examples of other frequently used estate planning solutions:

Gifting

‍Unlike BR, gifting assets can immediately reduce an estate's value for IHT purposes, but this strategy requires surviving seven years after the gift for it to be outside the estate.

Trusts

Trusts provide a mechanism for asset control and protection. However, they can involve relatively complex legal structures and ongoing administration. Trusts can be subject to their own tax regime, including IHT under certain conditions.

Life insurance policies

Life insurance can pay the IHT charge if the client were to pass away in the first two years. Depending on an individuals circumstances insurance may be prohibitively expensive or not available.

Pension contributions

Pensions can be an effective way to pass wealth and are generally outside the scope of IHT. However, there may be some other taxes you need to consider, such as income tax.

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FAQs

Can Business Relief be combined with other IHT reliefs and exemptions?

Yes, Business Relief can be used in conjunction with other forms of IHT relief, such as Spousal Exemption or annual gift allowance. This allows for a more comprehensive estate planning strategy. It's important to understand how different reliefs interact to maximise the benefits.

Are all businesses eligible for Business Relief?

Not all businesses qualify for Business Relief. Generally, it's available to trading businesses but not investment companies, property investment companies, or businesses primarily dealing in securities, stocks, or shares. The specifics can vary, so it's crucial to assess each business individually.

How does the ownership period affect Business Relief eligibility?

For Business Relief to apply, you must have owned the business or shares for at least two years before death and continue to hold them at the time of death. This period is crucial as it underscores the government's intention to encourage long-term investments in businesses.

What happens if the business changes its nature within two year period?

If the nature of the business changes such that it no longer qualifies for Business Relief within the two-year period, the relief may be jeopardised. It's vital to monitor the qualifying status of the investment regularly. This is something that an investment manager will continue to review on your behalf.

Can Business Relief be applied to investment made in companies located outside the UK?

Generally, Business Relief is aimed at UK-based businesses. However, there can be exceptions, especially in the case of companies with overseas operations but managed from the UK. It's advisable to check the specific criteria for each investment.

How does Business Relief interact with Capital Gains Tax (CGT)?

An estate doesn't have to pay any CGT on the property or assets that weren't sold (also known as unrealised gains) before the individual has died. But, if the property or asset is sold during probate and it's value has risen since the individual died, there is usually CGT to pay.

Is it possible to lose Business Relief eligibility after acquiring it?

Yes, changes in the business structure or operations can lead to a loss of BR eligibility. For instance, if a qualifying trading business starts to hold more investments, it may lose its eligibility. Regular reviews of the business’ qualifying status are essential.

Can Business Relief be used for business property and assets or just shares?

BR applies to both shares in a qualifying business and certain business properties and assets. Each asset must be individually assessed for eligibility.

How is Business Relief claimed?

Business Relief is evaluated by HMRC at the time of death when a claim is made. Claims are made by the executor of the will or the administrator of the estate of a person who has died. Form IHT400 (Inheritance Tax account) and schedule IHT413 (Business or partnership interests and assets) must be filled in when appraising the estate. You can find both forms here.

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Opinions expressed represent the views of the author at the time of publication, are subject to change, and should not be interpreted as investment or tax advice.

Important notice: This article is for investment professionals only. This article is for information only and does not form part of a direct offer or invitation to purchase, subscribe for or dispose of securities and no reliance should be placed on it. No reliance should be made on this content to inform any investment of tax planning decision.

This content contains information that is believed to be accurate at the time of publication but is subject to change without notice. The explanation of all of the tax rules set out have been written in accordance with our understanding of the law and interpretation of it at the time of publication.

Whilst care has been taken in compiling this content, no representation or warranty, express or implied, is made by Downing as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.