16 April 2024

A Business Owner's Guide to Inheritance Tax and Estate Planning

For most individuals, the largest asset to consider for inheritance tax (IHT) might be a house or car. For business owners, however, a successful company may have built up a complex range of assets, including properties, shares, stocks, and other investments. While businesses offer some protection for assets, it’s not as simple as keeping all your capital safe within your company.

In order to avoid the prospect of a 40% tax bill on your hard earned assets, proactive estate planning is crucial. Not only can this help you manage the tax burden for future generations, but it can also offer additional safety for your family and dependents when passing on wealth in future. Here, Haines Watts Leicester Director Shazin Tayub explains what the IHT landscape looks like for business owners and how the right planning can support you in future.


How does inheritance tax work for business owners?

As a business owner, the value of your trading company is generally not subject to IHT, as it qualifies for business relief. This is a valuable exemption, but it can become complicated when your business holds surplus cash, investment assets, or non-trading assets, as these can taint the qualifying trading status of your company for IHT exemption.

  • The company must be a trading business, not an investment one.
  • Must have been owned for at least two years before death, limiting the ability to pass on the company proactively
  • Relief applies to partnerships, unlisted companies, or significant shareholdings in listed companies.
  • The assets must be necessary for the business, like property or machinery, rather than accumulated investments.

A successful business may find that more of the value accrued can fall under the scope of IHT, which is why it's crucial to separate your investment assets from your trading assets.


What assets are relevant for inheritance tax?

When it comes to IHT, various assets are relevant, including:

  • Properties (both residential and commercial)
  • Shares in companies (both trading and non-trading)
  • Investments (stocks, bonds, funds, etc.)
  • Cash holdings
  • Valuable personal belongings (art, jewellery, antiques, etc.)

These assets can be subject to IHT as personal or professional liability – the goal for effective planning is to move these into a structure that not only protects them from undue tax, but also safeguards them from unforeseen events in your own family.


How can business owners manage their inheritance tax exposure?

Company structure and asset allocation enables business owners to secure capital and investments within purpose-created vehicles that fall outside the purview of IHT.


Family Investment Companies (FICs)

In recent years, Family Investment Companies (FICs) have become increasingly popular as a means of estate planning. A FIC is a private limited company set up specifically to hold and manage a family's investments and assets. This structure allows you to separate your investment assets from your trading assets, which can help preserve valuable tax reliefs, such as business relief, for your trading company.

A typical FIC setup might involve the following:

  • The founders (e.g., husband and wife) hold voting and income shares in the FIC, giving them control over the company's operations and the ability to draw dividends.
  • A discretionary trust is established for the benefit of the children or future generations.
  • The founders transfer their capital shares into the trust, effectively gifting the future growth in value to the trust beneficiaries.
  • The FIC can invest in various assets, such as properties, stocks, and shares, with the growth in value accruing to the trust rather than the founders' personal estates.

The power of discretionary Trusts

Discretionary trusts can be a powerful tool for managing IHT exposure and passing on assets to future generations. With a discretionary trust, the trustees have the discretion to distribute income and capital to the beneficiaries as they see fit. This flexibility allows for more effective tax planning and asset protection.

There are several ways to utilise discretionary trusts in your estate planning:

  • Placing assets directly into the trust (e.g., rental income, investments)
  • Using capital from the trust to acquire assets (e.g., properties, shares)
  • Assigning shares in your business to the trust before a sale, allowing the sale proceeds to flow into the trust

By keeping assets within a trust structure, you can maintain control and protect them from potential risks, such as family conflicts or marriage breakdowns, while also mitigating your IHT exposure.


A strategic approach to estate planning

When it comes to passing on assets to the next generation, timing is crucial. Transferring assets directly, such as property, can trigger capital gains tax and potentially pass on an IHT liability to your beneficiaries. Additionally, there are risks associated with direct transfers, such as the potential for assets to be exposed to changing circumstances within your family.

Keeping assets within a trust structure can help mitigate these risks and ensure that your assets remain within the family for generations to come.


How Haines Watts can support your estate planning

The tools and strategies available for managing IHT are highly flexible and diverse. That’s why, at Haines Watts, our advisors work closely with business owners to create tailored plans to suit their individual goals and circumstances.

We can help you to:

  • Assess your current asset position and potential IHT exposure
  • Develop strategies to mitigate your IHT liability
  • Establish appropriate structures, such as FICs or trusts to safeguard assets
  • Ensure compliance with tax regulations and reporting requirements
  • Review and adjust your estate plan as your circumstances change

To find out more, get in touch with one of our experts today.