This type of transfer is inheritance tax (IHT)free. But a simple change to your will could double this tax advantage. How?
Business property relief
If you own a business, or part of one, you can pass it to whoever you want free of inheritance tax (IHT) while you’re alive, or through your will, as long as it meets the conditions for business property relief (BPR). BPR is open to shareholders of trading companies as well as businesses owned by partners or sole traders.
The generation game
It’s always a good idea to have a will, especially if you’re a business owner, as this gives you the opportunity to plan the best way to use BPR. The standard planning method would be to leave the business to your spouse with the idea that they’ll pass it to the children when the time comes. On the face of it this looks sensible and tax efficient.
Example 1 – transfer to spouse
Paul is 57 and a director shareholder of Potash Ltd. His share of the company is worth £300,000. Paul dies suddenly, leaving his whole estate to his wife Sue, with the idea that when she thinks the time is right she’ll give the shares to the children. The transfer to Sue is IHT exempt because she’s Paul’s spouse and the subsequent transfer to their children qualifies for BPR. IHT is therefore avoided on the £300,000.
Example 2 – transfer to children
The circumstances are exactly the same as in Example 1, except that this time in his will Paul leaves the business to his children with an understanding that Sue can immediately buy it from them. The business qualifies for BPR and so passes to the children IHT free. The money Sue pays them for the business is IHT neutral because she pays £300,000 and in return receives an asset of equal value. When later Sue gives the business back to the children it will qualify for BPR again, so it will have been allowed twice on the same asset.
Points to watch
The plan relies on Sue having enough money with which to buy the business from her children. Apart from this, the only point to be wary of is that Paul’s will must not include a clause instructing his children to sell the business to their mother, as this would break one of the conditions of BPR. After discussing the reasoning behind his will Paul can leave a non-binding letter of wishes for his children confirming what he had in mind. This won’t break the BPR conditions.