Protecting your business interests for your descendants is an important step in ensuring the longevity and stability of your assets and the business you’ve built – whatever happens to you.
Some of the ways you could protect your business interests include:
1. Preparing LPAs for business purposes only
A Lasting Power of Attorney (LPA) is a legal document allowing someone to appoint one or more people to make decisions on their behalf, should they lose the ability to do so themselves. They’re often used for personal health and welfare and property and finance matters but can be used for business holdings too. A number of our clients have two Property and Financial Affairs LPAs, one for personal finance LPA and one that just covers your business interests, particularly when the business is technical or regulated.
If you’re a business owner, using an LPA ensures that someone can step in and manage the business if you’re unable to do so, be it due to illness, absence or other unexpected circumstances. Without an LPA, your business can be at risk, as it could be subject to disputes or difficulties accessing financial accounts particularly worrying if there are employees. There are particular concerns when the business is owned by only one or two people.
2. Business Property Relief
Business Property Relief (BPR) is a tax relief in the UK which reduces the amount of Inheritance Tax (IHT) owed when someone inherits a business or its assets. BPR is designed to keep a business running after the owner’s death, making it more affordable to pass on. To qualify for BPR you must meet the 2-year ownership rule.
If you inherit a business or its assets, BPR can provide between 50% to 100% relief.
The 50% relief applies to shares in a listed company, land, buildings and machinery owned by a partner but leased to a business.
The 100% relief applies to a sole trader business, partnerships, shares in an unlisted company, and business assets.
This relief is capped at £2.5 million. If married or in a civil partnership the relief is transferable so that the couple potentially have £5 million of BPR.
3. Pensions and business premises
Historically, pensions were IHT free and some business owners put their business premises into their pension. The business and the property could get 100% BPR (or 50% if in the business owner’s name and used by the business). Anyone who has done this must be aware that from 6 April 2027 there will now be 40% IHT payable on the pension (outside of any Nil Rate Band) payable 6 months after death. Not only will it be hard to value those assets, liquidating them could be devastating to the business and you won’t benefit from BPR on it.
4. Spouse Exemption
One thing to consider with Inheritance Tax planning when you’re married is that there is also an exemption for your spouse. If you have a similar value of non-business assets and business assets, you are married and are content to own your estate relatively equally, you could benefit from ‘double dip’ estate planning, whereby you make the most of your BPR relievable assets and your spouse exemption and pass on the maximum amount possible to your ultimate beneficiaries.
5. AIM listed shares pay a reduced rate of IHT
It is also worth noting that Alternative Investment Market (AIM) listed shares can also qualify for 50% BPR i.e. 20% tax instead of 40%. For investors, this means you can still hold shares in smaller, growing companies and still get tax relief.
For AIM shares to qualify, they must:
- Be in a company that’s trading, not an investment company.
- Have been held for at least two years before you die.
- Not be part of a portfolio of investments.
If you’d like to discuss how to protect your business interests for your family in the longer term, contact Helen Freely, a consultant on our Private Client team at hf@branchaustinmccormick.com or +44 (0) 207 851 0112.