As soon as you retire from your unincorporated business the risk of a higher inheritance tax bill on your estate goes through the roof. How can you prevent this from happening?
IHT-free assets
While the value of your business is part of your estate, it escapes a charge to inheritance tax (IHT) if business property relief (BPR) applies. BPR can apply to lifetime gifts of business assets which would otherwise be chargeable to IHT, e.g. a gift of shares in your company via a trust, and to business assets in your estate when you die. When you retire from your business BPR can disappear overnight.
Business partners
If you’re in a business partnership the value of your share of it qualifies for BPR subject to the conditions. If you leave the partnership and take your capital with you, BPR immediately ceases to apply to it.
Trap. By itself, leaving your capital in the partnership after you’ve retired won’t prevent the loss of BPR.
Tip. You can preserve some BPR on your partnership capital by remaining a member of the partnership even in a vastly reduced capacity. You can cease to have an active role in the business and the management of the partnership but still be a member of it.
Partnership restructuring
Remaining a partner will, of course, require agreement from the other partners along with a reduction in your share of the partnership profits so they are commensurate with your financial involvement and your continuing legal obligations as a partner. In practice, this sort of arrangement is more suited to a family-owned partnership where there are common interests and ties, but it can be used for any partnership.
Tip. Don’t leave the planning until the last minute. This kind of set up takes time to translate into a formal agreement.
Trap. As a partner you are jointly and severally liable for the debts of the partnership even if you only have a very minor role.
Sole traders
If you’re a sole trader when you retire, the business will come to an end unless you sell it. Either way, the capital you had tied up in your business will immediately cease to qualify for BPR as soon as you stop trading.
Tip. You could create a partnership before you stop trading and continue as a member on the terms we described above. A family member you can rely on to continue the business for long time is probably the best candidate. It doesn’t matter if the type of business carried on by the partnership is different from the existing trade. It’s your position as a partner that counts.
Tip. Alternatively, you could set up a company with you and one or more other people as shareholders and transfer your business to it. You can receive shares in exchange for the value of the business. The advantage of this route is that there’s no requirement for you to play a part in the running of the company.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.