Getting Started

Safeguarding your legacy

Many business owners fail to consider the need to maximise value and minimise liabilities for their heirs

Safeguarding your legacy

Many business owners understandably concentrate on the day-to-day running of their business and its medium-term strategy; and do not give a great deal of thought to what happens after their death or how to maximise the value of their business for the family that they leave behind. This is a subject, however, that’s worth taking time over as the right action can make a significant difference to the tax that might otherwise be payable to HMRC.

Business Property Relief: too valuable to ignore

Most business people will be aware that, at present, there are valuable reliefs from Inheritance Tax (IHT) available for business assets. Broadly, an interest in a business, unquoted shares or quoted shares which give their owner control of the business, will qualify for 100% relief from IHT, whilst land, buildings, plant and machinery, used wholly or mainly for the purpose of the owner’s business, will qualify for 50% relief. In both cases, the business must be a trading one (rather than an investment company) and the business assets need to be owned for a minimum of two years prior to the transfer giving rise to the IHT charge.

These are self-evidently valuable reliefs and it is essential to ensure that the business is structured in such a way as to maximise them. Care should always be taken when setting up the company that its documents of incorporation are drafted to maximise reliefs and to facilitate future IHT planning. For example, it would be advantageous to ensure that the transfer of company shares to trusts is permitted both during lifetime and on death. In addition, some provisions could be fatal to Business Property Relief, such as providing for business interests to pass to personal representatives who are obliged to sell them to the surviving partners, who are also obliged to buy them. Such an arrangement is viewed by HMRC as a binding contract for sale and will mean complete denial of relief.

Ongoing vigilance is required

Once the company is set up in the best form to ensure maximum use of the reliefs, then care is needed on an ongoing basis to ensure that the company does not fall into some of the traps for the unwary that lurk within the relevant legislation.

Common pitfalls include:

• Diversifying the business activities from trading ones to those regarded by HMRC as investment activities (for example, the letting of commercial property) to the extent that the business becomes mainly an investment company and Business Property Relief is denied on a transfer of value

• Maintaining cash balances in the business which are not required for its normal operation, perhaps out of a wish to minimise personal taxation; such cash balances will not qualify for relief

• Ownership of business premises outside of the business; whilst this may be desirable for other reasons, the rate of relief is reduced by half to 50%.

Planning for maximising value post-death

Once a company is set up in the best way, then thought should be given to what happens in the longer term. The most important tool in achieving this objective is a well-drafted, tax-efficient Will*; a document that should be regarded as essential for anyone with business assets.

The first point to bear in mind when structuring a Will is that business assets should qualify for 100% relief from IHT and, as such, a gift of these to a surviving spouse or registered civil partner is a waste of that relief as these gifts are exempt in any case. The preferable course of action is to leave the business assets to a discretionary trust* in the owner’s Will. No IHT will be payable on the business owner’s death before his or her spouse because of the availability of spouse relief and Business Property Relief. However, the shares are outside of the surviving spouse’s estate which could be very advantageous should the law change to make the relief less generous by the time of the second death or if relief is no longer available because, by that point, the business has been sold.

For example, Derek dies leaving his company shares worth £300,000 to a discretionary will trust and the rest of his estate to his wife Carol. Carol can still receive dividend income from the shares at the trustees’ discretion. The business is sold three years after Derek’s death and Carol dies five years later. The cash proceeds of the shares are outside of Carol’s estate in the trust and do not suffer IHT in Carol’s estate, saving IHT of up to £120,000 on current rates.

A double dose of relief

If it is intended that a business should remain trading indefinitely, perhaps because the second generation intends to carry it on, then it is possible with planning to achieve a double helping of Business Property Relief, minimising IHT significantly and perhaps adding to the business’s future viability.

This can be achieved by the surviving partner buying the shares left to the discretionary trust. So in the example above, following Derek’s death, Carol continues running the business with their son Andrew. Carol buys the company shares from the trustees of Derek’s discretionary will trust for £300,000. On Carol’s death she owns the shares, which have 100% relief from IHT, and the money that she has paid for them sits outside of her estate in the discretionary trust. Effectively £600,000 worth of assets are outside of the IHT net, with relief claimed on both Derek’s and Carol’s death. This delivers an IHT saving of up to £240,000 – a significant sum of money.

Essential points for all business owners

In summary:

• take advice

• make sure incorporation documents are structured in the right way

• remain vigilant against the dangers of prejudicing the availability of relief

• make a Will and ensure that it makes maximum use of reliefs and mitigates IHT as much as possible.


The levels and bases of taxation and reliefs from taxation can change at any time and will be dependent on individual circumstances.

* The writing of a Will and aspects of succession planning involve the referral to a service that is separate and distinct to those offered by St. James’s Place. Wills and Trusts are not regulated by the Financial Conduct Authority or the Prudential Conduct Authority.