05 February 2016 #Private Client
If you are married and have an interest in a business, it’s worth considering whether your Will is as inheritance tax efficient as it can be. Where your assets, combined with those of your spouse are likely to exceed £650,000 (plus any available residential nil rate band - being phased in from April 2017), it may be more tax efficient to leave your business assets to a discretionary trust - rather than to your spouse.
Although there would be no inheritance tax to pay on the first death where all assets were simply left to your spouse, the above course of action could save a significant amount of inheritance tax on the subsequent death of your spouse. The reason for this is that a relief known as business property relief can be used to transfer the business assets into a discretionary trust free of inheritance tax on the first death. As the business assets would then be owned by a discretionary trust, they will not form part of the estate of the surviving spouse on their death. The surviving spouse can still benefit from the assets held in the trust during their lifetime.
If the business stops trading after the death of the first spouse, the assets will no longer qualify for business property relief. This means that if the surviving spouse owned these former business assets at their death, they could be chargeable to inheritance tax at a rate of 40%.
The inheritance tax treatment of discretionary trusts is far more lenient than that for individuals. Even if the business had stopped trading and no longer qualified for business property relief on the death of the surviving spouse, the former business assets could then be appointed out of the trust to the next generation, subject to a maximum inheritance tax charge of 6%.
If you would like further information about utilising this generous relief, please don’t hesitate to contact a member of our private client team who will be happy to answer any queries you may have.
Our private client team are also able to assist with any queries you may have relating to Wills, Trusts, Powers of Attorney (including EPAs and LPAs), Court of Protection work (including Deputyship applications) and general Inheritance Tax planning.