Protecting Family Businesses
Business Relief was introduced in 1976 with the intention to stop family businesses being sold or broken up to pay inheritance tax on the owner’s death. 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 hold 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. If you already own one of these, you can read more at our Business Owners Blog here.
You don’t have to own your own business though to qualify for the 2-year relief. There are also investments that qualify for business relief; shares in the Alternative Investment Market (AIM), Enterprise Investment Schemes (EIS) and specialist Business Relief (BR) funds.
For such a fast-acting exemption from IHT there is an inevitable trade-off though. The AIM market is for small UK companies and therefore is very volatile, much more so than the main UK stockmarket. Your risk to capital might be more than the tax potentially saved. EIS investments also invest in early-stage UK companies and come with a high degree of risk of individual company failure and loss of capital. They also are illiquid, and, in most cases, you have to wait for the fund manager to sell the underlying companies and pay the cash back to you. BR funds tend to invest in lower volatility investments such as infrastructure (wind and solar farms, storage units etc) but the valuations are not fully known until the asset is sold and growth after fees can be sluggish. There is also liquidity risk because of the nature of the underlying assets not being easy to sell. All three come with political risk, which is the risk of a change in legislation removing the tax relief and creating a wave of investors trying to get their money back. We look at EIS investments in more detail in a later section.
Business Relief investments are available to Altor clients in our Bespoke Service. Nothing on this website or its links constitutes a personal recommendation; the information contained is designed to be informative but not to be relied upon as individual circumstances could affect the relevance of this guidance.