1976 was a great year; The Boys Are Back in Town was released, I was born, and Business Relief was introduced. I have no idea what the idea was behind the first two but the idea behind Business Relief was to stop family businesses being sold or broken up to pay inheritance tax on the owner’s death.
Inheritance Tax (IHT) is the rate of tax paid on death and is 40% above a certain level. Since 1976, trading businesses can get 50% or 100% relief against inheritance tax. This is incredibly valuable as most UK businesses are small to medium size family run businesses. Even excluding sole trader businesses which have little to no value on death, there are still 1.4 million small businesses with employees in the UK. A lot of these will be passed on to family, if they are not sold.
Unlike holding these assets directly, even property and machinery held in a qualifying business may be included in the value exempt from IHT. It is also a very fast acting relief, as you only have to have held the shares in the business for 2 years.
The main business category that does not benefit from Business Relief is investment companies (those dealing in stocks, shares, land and property) as it is designed for companies that are trading.
Where we have seen this become an issue for clients in the past with genuine trading companies, is where they are holding too much cash in their business. This can build up over time if an acquisition doesn’t come off or because it is felt that the tax on extracting the cash from the business is too high.
So what can you do to make sure that the ‘passive’ assets in your company don’t affect your IHT exempt status?
Well firstly, if the cash is genuinely for future acquisitions, then you can help yourself by making sure that this intention is properly documented in the Board minutes. We have referred business owner clients to specialist accountants in the past to help them through this.
You can also extract cash from the business into a pension for any employed director (including spouse and children if they can play a role in the business), which provides a corporation tax deduction, is paid without deduction of income tax and goes into an environment (the pension) that is also exempt from IHT.
There are also business relief qualifying investments that the company can make with its own cash, but this is a complex area requiring specialist advice.
Altor is currently advising business owners across Hampshire, Berkshire, Surrey and Nationally to minimise their tax exposure.
Contact us to find out more.