When it comes to inheritance tax (IHT), one of the main concerns for business owners is how much their business is worth when assessed against the taxman’s bill.
Thankfully, there’s a relief in place which can greatly reduce the taxable value of a company – known as ‘business relief’.
This guide will tell you all you need to know about what business relief entails and how you can benefit from it.
What is Inheritance Tax?
Inheritance Tax (IHT) is a tax that’s levied on the estate of someone who has died. The ‘estate’ comprises all the property and possessions owned by the deceased person, including any money held in bank accounts, investments and life insurance policies. The tax is only payable if the value of the estate exceeds a certain threshold – currently £325,000.
If you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club, you do not have to pay Inheritance tax at all.
What is Business Relief?
Business relief is a measure that’s designed to reduce the value of a business for IHT purposes. When it’s applied, the value of the business is typically reduced by two-thirds or more, which can result in a significant saving on the amount of IHT that’s due.
You can claim relief on property and buildings, unlisted shares and machinery.
How Does Business Relief Work?
Business relief works by reducing the value of a business or its assets when it’s being calculated for IHT purposes. This means that if the value of your estate is below the IHT threshold, your loved ones may not have to pay any tax on your business at all.
In order to qualify for business relief in the UK, there are a few conditions that must be met:
– The business must have been owned by the deceased person for a minimum of two years before their death.
– The business must be a ‘qualifying’ business, which includes companies that are actively trading as well as some unincorporated businesses, such as sole tradership and partnerships.
– The business must not be classed as an ‘excluded’ business, such as certain types of investment companies.
Why Claim Business Relief?
The main benefit of business relief is that it can potentially save your loved ones a significant amount of money in IHT.
However, there are other advantages too, such as:
-It can help to ensure that your family business can continue to trade after your death.
-It can make it easier for your beneficiaries to sell the business, as it will be free of IHT.
-It can give your family more time to pay any IHT that’s due, as they will have up to six years to settle the bill.
Who Can Claim Business Relief?
Business relief can be claimed by any UK resident who owns a qualifying business. This includes individuals, partnerships and companies. Non-UK residents may also be eligible for business relief if they own a business in the UK.
What Will You Get with Business Relief?
When it comes to business relief, you can potentially reduce the value of your company by two-thirds or more. This means that if your estate is valued at £300,000, the amount of IHT payable could be reduced to £100,000. In some cases, it may even be possible to completely exempt your business from IHT.
It’s also worth noting that if you’re a shareholder in a company, you may be entitled to business relief on your shares. This could potentially reduce the value of your shares by 50% or more for IHT purposes.
How Can You Claim Business Relief?
If you think you may be eligible for business relief, the first step is to seek professional advice. This is because the rules around business relief are complex and can be difficult to navigate without expert help.
Once you’ve sought professional advice and determined that you meet the eligibility criteria, you can begin the process of claiming business relief. The first step is to value your business or shares using a professional valuation service. You will then need to complete an IHT400 form and IHT413 schedule and submit them to HMRC along with your valuation report.
If you’re successful in claiming business relief, the value of your business or shares will be reduced for IHT purposes. This could potentially save your loved ones a significant amount of money.
To conclude, business relief is a valuable tool that can be used to minimise the amount of IHT your loved ones will have to pay on your estate. However, it’s important to seek professional advice to ensure that you meet the eligibility criteria and that your estate is structured in the most tax-efficient way.
