IHT business relief: could you cut your Inheritance Tax bill?

Did you know that the Inheritance Tax (IHT) threshold has been set at £325,000 since 2009 (and is frozen at that rate until 2028)? According to the Bank of England’s inflation calculator, if the threshold had increased in line with inflation, the threshold would now be just under £484,000. The net result has been that growing numbers of estates are being caught in the Inheritance Tax net. Many of these estates belong to business owners. If you are one of them, you may be interested to know that something called IHT business relief could help you cut your Inheritance Tax bill – or even avoid IHT altogether.

What is IHT business relief?

Businesses are often exempt from IHT. The idea is to let you pass on a business without facing a large tax bill that could threaten its viability.

There are two rates of IHT business relief. You can get 100% relief on:

• A business or interest in a business (it must not be listed on a main stock exchange or have more than 50% of its activities focused on property investment, stocks and shares, land or buildings)
• Shares in an unlisted company

You can get 50% IHT business relief on:

• Shares that control more than 50% of the voting rights in a listed company
• Land, buildings or machinery owned by the deceased in a business they controlled or were a partner in
• Land, buildings or machinery used in the business and held in a trust it has the right to benefit from.

For example, if you own a small retail store and you invest £100,000 in the business, that money qualifies for IHT business relief two years after you make the investment. If you die less than two years after investing, the money will be considered part of your personal estate for IHT purposes.

Passing a business on to your children

There are various different ways of passing on business to your children. We would strongly recommend talking to one of our tax planning advisors to find the best strategy for you.

One method is for the children to buy shares off a parent. The problem with this is that the money becomes part of the parent’s personal estate. The cash could then become taxed at 40% if IHT is due.

It’s usually a better option for the parent to draw up a will that passes on the business. In this way, you can usually pass on a trading business tax free. However, there is one thing you need to be careful about: the percentage of cash on your balance sheet. Say your business has a turnover of £150,000 and £800,000 in cash, HMRC could regard this as an ‘excepted asset’. If this happened, IHT business relief would not apply.

Invest in a child’s business

One less common way of qualifying for IHT business relief is to invest in a child’s business. This can have significant benefits. Not only do you help your child to grow their business and improve their turnover, the shares you buy become exempt from IHT after two years.

Can you advise me on IHT business relief?

THP’s accountants can help you with all aspects of estate planning, including IHT business relief. The key to minimising both Inheritance Tax and Capital Gains Tax is to start planning as soon as possible. Give us a call today.