Essential Inheritance Tax Strategies for Business Owners

As a business owner, you’ve doubtlessly poured countless hours and effort into building up your enterprise. This makes it crucial that your time, hard work, and capital don’t go to waste — so, how can you preserve as much of your wealth as possible for future generations? 

One significant challenge in this endeavour is Inheritance Tax (IHT), which can, if not managed properly, substantially diminish the overall value of an estate. Fortunately, there are a number of effective Inheritance Tax strategies you can implement to mitigate your liability, allowing you to pass on more of your hard-earned wealth.

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What Does Inheritance Tax Mean?

Inheritance Tax is a levy that’s imposed on an individual’s estate upon their death. It is payable on a number of different assets, such as property, money, and investments. Reducing the impact IHT can have requires a comprehensive wealth protection strategy that uses several different legal mechanisms like wills and trusts. 

Each individual has a Nil Rate Band (NRB), which is how much the value of their estate can be worth before IHT is charged. As of June 2024, this amount is £325,000. Anything above this figure attracts a levy of 40%. 

Assets Covered by Inheritance Tax

Generally speaking, anything of value is included in your estate for Inheritance Tax purposes. Examples of chargeable assets are:

  • Bank Accounts
  • Property
  • Shares and Investments
  • ISAs
  • Jewellery and Antiques
  • Vehicles
  • Life Insurance (policies that aren’t held in a trust)
  • Gifts (made within 7 years of the individual’s death)

Items such as pension plans, trusts, and certain life insurance policies are not deemed to be part of an estate, meaning they will not be subject to Inheritance Tax. Outstanding debts and funeral expenses are also taken from the estate after death, reducing its value further. 

8 Inheritance Tax Strategies for Business Owners 

If you own a business, there are certain types of shares and assets that can be fully-covered by Business Relief (BR), meaning they could be completely free of IHT. Knowing how best to utilise this mechanism is crucial to reducing the value of your estate and the amount of tax you’ll need to pay. Speaking to a specialist solicitor will help you achieve this. 

Here are the main ways to take advantage of business relief and other Inheritance Tax strategies in more detail. 

1. Leave Shares in Your Will

If you own a private company, any unquoted (not traded on a recognised stock exchange) shares you bequeath in your will are free of Inheritance Tax if fully-covered by Business Relief. This is provided you’ve held them for at least two years prior to death. The same is also true for shares left to charity. 

Any shares listed on the alternative investment market and those that qualify for the enterprise investment scheme could be exempt from IHT too, as long as they have been held for at least two years. Shares in an investment company, however, will not be available for Business Relief and will attract Inheritance Tax in full.

2. Sell Shares Upon Death

It’s common practice for business owners and shareholders to insure themselves or each other to provide a cash lump sum upon their death. The funds from this policy are then used to purchase the deceased’s shares. Provisions for this are usually set out in the shareholders agreement.

Selling limited company shares usually happens using one of two methods; a “buy and sell” or “double-option” agreement. The latter option is widely considered to be more Inheritance Tax efficient. 

To find out more about what happens when a shareholder dies, read our article on the subject here

3. Share Buyback

A company may be able to buy back and then cancel shares, provided certain conditions are satisfied. These include:

  • All shareholders must agree to this
  • There are sufficient distributable reserves available 
  • Funding for the transaction comes from the business itself

This approach should only be carried out once the probate process has completed, so the estate can potentially benefit from Business Relief. 

4. Transfer Shares into a Trust

In cases where BR applies, any shares transferred into a trust will be sheltered from Inheritance Tax. Anything not exempt is subject to IHT if it falls outside of the NRB and other allowances. 

5. Directors Loan Accounts

Funding your company with cash, introducing assets (such as cars) to the business, and failing to withdraw dividends, are all actions that can add to your directors loan account. The value of this is susceptible to Inheritance Tax.

To alleviate this, you may want to consider replacing any cash in your loan account with bank financing, or moving funds into an IHT-exempt “wrapper” (a mechanism designed to offer tax protection to your investments). Another option is to capitalise your loan account into shares, potentially achieving BR relief. 

6. Make Use of Other Reliefs

As well as BR, farming businesses can qualify for Agricultural Relief (AR) to potentially greatly reduce their Inheritance Tax liability. AR is available on buildings on plots of land that are used exclusively for farming purposes. A specialist agricultural solicitor will be able to help you with this. 

7. Give Gifts During Your Lifetime

Provided it was given seven years prior to death, any gift given is exempt from IHT. If not, the levy will be charged on a sliding scale known as ‘taper relief’. You are able to give up to £3,000 worth of gifts each year without it being added to your estate. It’s also possible to give an unlimited number of gifts up to the value of £250 per person, per tax year, as long as you haven’t used another exemption on the same individual.  

8. Use Your Allowances

The last of our Inheritance Tax strategies for business owners involves fully-utilising the various allowances available to you. This includes the £325,000 Nil Rate Band we’ve previously mentioned. If you leave all of your assets to your spouse when you die, they will inherit your NRB, meaning they can gift up to £650,000 before IHT is due. 

Another allowance at your disposal is the Residence Nil Rate Band, which provides you with further £175,000 worth of relief. This must be set against your main residence and be gifted to a child or grandchild.

Tailored Inheritance Tax Strategies from Thursfields

If you’re a business owner looking to reduce your Inheritance Tax liabilities, it’s important to seek experienced legal advice that is tailored to your unique circumstances and goals. There’s no one-size-fits-all solution.

The private client team at Thursfields has a great deal of expertise in dealing with all aspects of wealth protection, including tax advice, business succession planning, and the creation of a last will and testament. As a full service law firm, we can also call upon the expertise of other departments to assist with items such as shareholders agreements where necessary.

Because we build our service around our clients, we’ll gain a thorough understanding of your situation and what you’re looking to achieve, before recommending a full suite of Inheritance Tax strategies designed to deliver your desired results.
To find out more about how we can help, get in touch with our team today.

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