Using business relief to reduce inheritance tax

It can be frustrating for beneficiaries to suffer a huge loss at the expense of a hefty inheritance tax (IHT) bill.

However, there are ways that you can pass on business relief either during your lifetime or as part of your Will to ensure that your loved ones get the maximum profit from your property.

Firstly, remember that if you own a business, or even a share in a business, then this is counted as part of your estate and is liable for IHT.

HM Revenue and Customs has outlined the many characteristics to inform you of whether or not your are eligible for business relief.

As such, you can claim the tax exemption if you own a business, or shares in a company, that is not listed on a recognised stock exchange, including those traded on the alternative investment market.

You also quality for relief if you hold shares or securities that give you control of a company which is fully listed on a recognised stock exchange.

It is also possible to claim relief on any land, buildings, plant or machinery you own, although it has to have been used frequently in the last two years before the firm was passed on.

This also applies to land, buildings, plant or machinery used in your business and held in a trust that you have the right to gain from.

A slight grey area arises when the building is made up of both company rooms and home spaces, with the business' areas qualifying for relief only.

Instances where you cannot claim business relief include when the company is a not-for-profit organisation or when it is being wound up, except when this is part of a process to allow the business to continue operations.

Business relief is not awarded to companies that mainly deal with securities, shares or stocks, land or buildings or in making or holding investments.

If the business is subject to a contract for sale, it is unlikely to quality for relief. However, it will be if the sale is to a company that will carry on the operations.

In this scenario, you would be paid wholly or mainly in shares of the acquiring business.

It is not possible to claim relief on a business asset if it already qualifies for agriculture relief or has not been used for company purposes in the two years before it was passed on as a gilt, either during your lifetime or as part of your Will.

Business assets that are not set to be used in the future of the firm are also ineligible for business relief on IHT.

Once you have found that your company does qualify for some form of relief, it should then be noted that you will receive relief of either 50 per cent or 100 per cent, depending on the kind of asset.

The estates of people who died after 6th April, 1996, qualify for 100 per cent relief, even through interest in a business, or a holding share in an unlisted company.

Yet 50 per cent tax relief applies to shares controlling more than half of the voting rights in a listed company.

Land, buildings, plant or machinery used in a business that you are a partner in or control at the time of your death qualify for 50 per cent relief.

This applies to the same assets held in a trust where you have the right to benefit from the trust and use the assets from the trust in your company.

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Published on: May 30, 2012

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