Your Business as Part of Your Estate

The most significant asset in many business owners’ estate is their business itself. Depending on the nature and scale of the business it could easily dwarf the family home in terms of value – bearing in mind that, when calculating the value of the business, all related assets must be taken into account. This can include premises, plant and office equipment, and so on – as well as less tangible assets such as the value of the brand.

In any case, a huge number of business owners are likely to incur a significant Inheritance Tax (IHT) bill if they pass their business on to a successor without taking some action to mitigate their liabilities. The first step to determining what this bill might be is to have the business valued. This can be a complex process, particularly if your business is worth more than its physical assets. For example, if there is goodwill value in the business, or if you have an established brand, determining their value requires a significant amount of knowledge.

Business valuation

There is a variety of approaches to business valuation, each of which is suitable for different circumstances. In any case it is likely that you will require the services of a valuation professional. It is also important to remember that, for estate purposes, you are concerned with the value of your interest in the business – so, if you have partners or other directors, the value of your interest will be less than the overall value of the business.

Your interest in the business is a part of your estate in exactly the same way as any other asset. It will be subject to the same rules and levies of inheritance that applies to any other part of your estate, such as your home. This can have significant implications if you are intending to pass your business onto a beneficiary upon your death.

Many business owners consider establishing trusts to separate themselves from their business for tax purposes. In many cases this is a sensible choice; it is possible to retain some say over the running of the organisation, even on an informal basis, while divesting yourself of the company and its assets for tax purposes. Indeed, many company directors choose to establish ‘blind trusts’ for the purpose of tax mitigation while they are alive.

Tax relief

However, in many cases establishing a trust to minimise an Inheritance Tax bill is unnecessary. There is a variety of tax reliefs available to entrepreneurs, as a result of recent changes to the business and inheritance tax schedules. These include lower Capital Gains Tax rates for business assets, and the ability to defer CGT charges until after the business has been passed on, as well as favourable treatment under the Inheritance Tax schedule. These reliefs are discussed in greater detail elsewhere in this section.

It is worth remembering, however, that business valuation and succession is a complex area – and one that can have a significant impact on the financial wellbeing of your dependants. As such, you should always seek professional advice before making any decisions.