Want to save millions in Inheritance Tax? Here’s how Business Relief can help

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You may already have an estate plan in place, but does it make full use of all the available allowances, reliefs, and exemptions?

Inheritance Tax (IHT) can significantly reduce the wealth you’re able to pass on to loved ones, so it’s important to review your estate plan regularly to ensure it remains aligned with your personal circumstances and wider legislative changes.

Business Relief (BR) can offer up to 100% IHT relief on certain assets, but it is often overlooked as an estate planning strategy despite its many benefits.

Read on to find out how BR could save you millions in IHT.

You don’t have to be a business owner to benefit from Business Relief

BR allows you to claim either 50% or 100% IHT relief on certain business assets. Importantly, you don't need to own or run a business yourself to benefit from BR.

You can claim 100% BR on:

• A business or interest in a business

• Shares in an unlisted company

• Enterprise Investment Schemes. ‍

The assets you can claim 100% BR on are limited to a total value of £2.5 million. This allowance also combines with assets on which you can claim Agricultural Relief (AR). You can also inherit a spouse or civil partner’s unused BR and AR limit, meaning you can have a collective limit of £5 million. Anything that would qualify for 100% BR above that threshold receives 50% relief instead.

You can also claim 50% BR on:

• Shares controlling more than 50% of the voting rights in a listed company

• Shares in a company listed on the Alternative Investment Market (AIM)

• Land, buildings, or machinery that were used in a business you were a partner in or controlled

• Land, buildings, or machinery used in the business and held in a trust that it has the right to benefit from.

There is no upper limit to the assets on which you can claim 50% BR.

Business Relief offers some advantages over other estate planning strategies 

While it is typically best to use BR alongside other estate planning strategies, it has a few unique advantages.

For instance, BR assets can become exempt from IHT after just two years while also allowing you to retain access to your capital, giving them potentially significant advantages over certain other IHT mitigation strategies. Gifting, for example, takes seven years for the gift to be fully exempt and means you lose control over the gifted asset.

Moreover, some BR schemes also include life insurance during the initial two-year qualifying period. If you then write the policy in trust, it can provide funds to help meet an IHT bill if you die before the investment qualifies for BR. However, this can be complex, so it’s important to speak to us before you adopt this strategy.

We recently helped a client reduce her Inheritance Tax bill by £190,000 using Business Relief

A client recently came to us knowing their estate was likely to face a significant IHT bill but was unsure how much it would be or what options they had.

We first calculated the value of their estate before applying all available allowances, including their own standard and residence nil-rate bands, as well as any transferable allowances from their late spouse. From here, we could see the estate's potential IHT liability. ‍

Because the client was older and wanted to retain access to their assets rather than make gifts, we recommended investing a portion of their taxable estate into a BR scheme. The investment included life insurance during the first two years, which provided cover for the estimated IHT.

This meant that the client had immediate protection against their estimated IHT liability, while also reducing their beneficiaries' potential IHT bill by around £190,000.

We can help you determine if Business Relief is right for you

BR can be a highly effective estate planning tool if you wish to reduce your IHT liability quickly while potentially retaining access to your capital. ‍

However, BR only forms one part of your wider estate plan and it’s a good idea to have a clear sense of how each component works holistically, so you can see how BR fits in. ‍

It’s also important to remember that if you invest in a BR scheme, the value of your investment can go up as well as down, which may not be appropriate for your situation.

At MLP, we can assess your circumstances, calculate your potential IHT liability, and determine whether BR should form part of your wider estate planning strategy. If it is suitable, we can then explore a range of solutions with you; if not, we can happily recommend alternative estate planning strategies that may be better suited.

To speak to one of our financial planners today, get in touch.

Email info@mlpwealth.co.uk or call us on 020 8296 1799.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.                                                                                                                                       

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.