Estates, Inheritance and Business Succession: A Case Study
Many people wish to pass their business on to a relative, but are concerned about the potential tax implications. Indeed, many business owners wish to pass on their business in order to minimise a potential Inheritance Tax (IHT) liability, but are unsure about how to achieve this in the most efficient method. Indeed, there is a small but thriving industry dedicated to advising business owners on the tax implications of business succession. This article looks at the experience of one business owner preparing to pass their company on to their son.
“My main concern was Inheritance Tax,” the business owner told us. “I am getting on, and I have built my business into something quite valuable. I have always intended to pass my business on to my son, but I was worried that I would leave him with a nasty tax bill.”
IHT and CGT ReliefThe business owner sought advice from a business succession professional. This advisor informed him of the variety of tax reliefs available to entrepreneurs as a result of the government’s 2008 reforms. Amongst the most significant are Capital Gains Tax and Inheritance Tax relief.
“I had previously thought that I would need to set up a trust to separate my business from my estate if I wanted to cut the tax bill,” the business owner said. “But in fact, I am about to transfer my business to my son as it is and it shouldn’t result in a tax charge.”
Inheritance tax relief is available when entrepreneurs pass their business, an interest in a business, or shares in a private company, onto a relative. While normally the individual disposing of the asset would have to live for at least seven years after the transfer in order for the tax relief to be granted, entrepreneurs passing on business assets are eligible for the relief after just two years. So, as long as the individual lives for at least another two years, there will be no Inheritance Tax charge.
The business owner is also going to make use of the Capital Gains Tax relief available under the government’s reforms. His business is worth just less than £1 million, and so the transfer will only attract a 10% CGT charge, rather than the standard CGT rate of 18%. It is worth noting, though, that if the value of the transfer was more than £1 million the excess would be charged at 18%.
Trusts vs Tax ReliefHaving investigated trusts in order to separate the business from his estate, the business manager was concerned that there would be a period of ‘limbo’ during which neither he nor his son would be responsible for the company. However, with the tax relief available he does not need to establish a trust as the tax liabilities are considerably more affordable – and, crucially, his son will not face an Inheritance Tax bill when the business owner dies.
Any important tax planning decisions should only be made after seeking professional advice – but this is particularly true of business succession choices. You should seek a consultation with a business succession advisor in order to ensure that you are gaining the maximum relief possible when you dispose of your business.