Inheritance Tax (IHT) is currently charged at 40% where a person’s taxable estate is in excess of £325,000 (£650,000 for married couples). This rate is reduced on a sliding scale for lifetime gifts made between three and seven years before your death.

In addition, a new further relief will be available, the IHT Residence Nil Rate Band (RNRB), which will gradually be phased in from 6 April 2017 and will reduce IHT bills for estates which include a property that was occupied as a home by the deceased, which is passed on death to a direct descendant. It will also apply where the estate includes money from the sale of the deceased’s home during their lifetime. The starting amount of a person’s RNRB will be £100,000. It then increases annually by £25,000 so that by 6 April 2020 it will be £175,000.

This will result in a person’s taxable estate having an allowance of up to £500,000 before IHT becomes payable.

For many people, planning to mitigate the liability to IHT forms an essential part of their estate planning strategy. Business Relief (BR) is a key relief that reduces the value of IHT charged, so individuals who invest in businesses and/or assets that qualify for BR may benefit from significant IHT savings. BR can be claimed on death or on any other occasion when IHT might be chargeable. It applies to qualifying assets, provided the deceased has owned the business or asset for at least
two years.

The Rules

Qualifying Assets

There are six categories of business property which qualify for relief. Those who invest in companies qualifying for BR can currently receive 100% BR for:

  • A business or an interest in a business (including a sole trade and partnership interests);
  • Unquoted securities which, either by themselves, or in conjunction with other holdings owned by the transferor, give control of the company immediately before the transfer;
  • Any unquoted shares, including shares listed on the Alternative Investment Market (AIM).

It is also possible to obtain 50% BR on:

  • Quoted shares or securities giving control of the company (more than 50% of the voting rights);
  • Land, buildings, machinery and plant owned by the transferor which, immediately before the transfer, were used wholly or mainly for the purposes of a business carried on by:
    • A company controlled by the transferor; or
    • A partnership of which he was a partner;
    • Land, buildings, machinery and plant used in a business and held in trust.

Some Exclusions

It is important to note that a few exclusions apply. Generally, BR cannot be claimed if the company:

  • Mainly deals with securities, stocks or shares, land or buildings, or in making or holding investments;
  • Is a not-for-profit organisation;
  • Is being sold, unless the sale is to a company that will carry on the business and the estate will be paid mainly in shares of that company;
  • Is being wound up, unless this is part of a process to allow the business of the company to carry on.

BR cannot be claimed on an asset if it:

  • Also qualifies for Agricultural Relief;
  • Was not used mainly for business in the two years before it was either passed on as a gift or as part of the Will;
  • Is not needed for future use in the business.

Considerations for Investors

Traditional gifting strategies often require the individual to survive the gift by seven years before it becomes fully exempt from the IHT. BR, however, is available after a minimum period of two years, making it an attractive option for many individuals.

Investment into BR also enables investors to maintain control and ownership of their investment. This includes the option of monthly, quarterly or full cash withdrawal should you require access to your funds.

There is no requirement that the holder of the shares should be involved in any way in the running of the business or the company. This can provide a way for family members who have funds to be involved in financing the company and to be able to pass on shares free of IHT.

Case Study

Janet, aged 80, recently sold her home to move in with her son Alan, following the death of her husband last year. With assets of £1,800,000, Janet is keen to organise her estate, hoping to pass it on to her son Alan in the most tax-efficient manner. With Janet’s health having deteriorated over the last few years, ‘gifting’ may not be the best option, as gifting is only completely free from inheritance tax should you live for seven years after the gift is made.

Janet’s adviser informs her that in addition to her own ‘Nil Rate Band’ (NRB) of £325,000, she is also entitled to her late husband’s NRB, providing her with an allowance of £650,000 free from inheritance tax. Janet’s adviser recommends that she invest £1,000,000 of her estate in BR-qualifying investments, and retains the remaining £800,000 – £650,000 in cash savings (free of IHT) and £150,000 to cover expenses in the last few years of her life. Within two years, her BR-qualifying investments would be free from inheritance tax, which she could then pass on to Alan upon her death. This would result in a tax saving of up to £400,000 on Janet’s estate (40% on £1,000,000).