Business Relief can play a key role in Inheritance Tax (IHT) planning for anyone, however it should be of particular interest to SME business owners.
Business Relief, or Business Property Relief as it used to be known, was first introduced in the 1976 Finance Act. It was introduced to ensure that, after the death of the owner, a family-owned business could survive as a trading entity, without having to be sold or broken up to pay an inheritance tax liability.
So long as the asset has been held for at least 2 years, it is possible to receive 100% Business Relief on:
· a business or interest in a business
· shares in an unlisted company
It also allows you to give away business property or assets while you are still alive and your estate can still benefit from Business Relief on Inheritance Tax.
So, having established that your business is IHT efficient while you own it and if you gift it, what happens if you sell it?
You need to be aware that if you sell your business or shareholding, the money you realise from the sale is now liable for Inheritance Tax.
However, it is possible to invest the funds realised from the sale of a business in to ‘replacement property’ and retain the IHT exemption.
Business Relief is not just for business owners, sole traders, partners and shareholders, it is for private investors too. Many private investors use Business Relief to help mitigate inheritance tax and there are a number of investment firms that make the process of investing in Business Relief qualifying companies very straight forward.
The advantage that the business seller has is that, while the private investor has to wait 2 years before their holding qualifies for Business Relief, a replacement investment qualifies immediately. The rules for replacements say that you need to have owned a qualifying asset for a total of at least 2 years over the last 5 years, and at the time of death or when the gift is made. Therefore, even if you have sold a business in the last couple of years you should look at the benefits of moving the proceeds from the sale back into a Business Relief qualifying investment.
While we are thinking about the tax implications of a business sale, it is worth bearing in mind the impact of Capital Gains Tax and reminding ourselves of the changes that were made to Entrepreneurs Relief in 2020.
For a start, it is not no longer called Entrepreneurs Relief. It is now called Business Asset Disposal (BAD) rate relief. While the rules were tightened slightly so that to be eligible, a shareholder must have a 5% or more shareholding, and have been involved for a year or more with a company as an employee or director, the most significantly change was that the lifetime allowance of gain that will be taxed at a reduced rate of 10% has been greatly reduced, from £10million to just £1million.
Without wanting to state the obvious, Capital Gains Tax is only paid on the gain, not the full sale price of the business. Any initial investment, directors loans, purchase costs and various other costs and fees can all be deducted. Also, even though gains in excess of £1mn will be taxed at 20%, Capital Gains Tax still remains one of the less punitive taxes. Therefore business owners should be able to extract a high percentage of the value of their business when selling.
Iain Campbell is a Senior Adviser at Stow Wealth Management Limited where he provides bespoke financial advice and planning to private individuals and companies.