What are the Inheritance Tax considerations for family business owners?

When it comes to succession planning in family businesses, there are many factors to consider, including the potential impact of Inheritance Tax (IHT).

IHT can be a significant expense for families transferring wealth to the next generation and given the spiralling increase in property prices, it is perhaps no surprise that more people than ever are now having to plan ahead to mitigate IHT.

However, with careful planning, it is possible to minimise the tax burden while still ensuring a smooth transition of ownership.

How does Inheritance Tax work?

Inheritance Tax applies on the estate of someone who has died when at least part of the estate exceeds the tax-free threshold of £325,000 (now frozen until April 2028). This usually consists of investments and general savings as well as property.

However, there are many exceptions to this, so it is important to understand if you will be charged IHT on your estate by calculating the value regularly.

If you believe your estate surpasses the threshold of IHT and your beneficiaries will be charged IHT after you have passed away, it is important to understand what they will pay and if there are any ways to plan for this and mitigate the costs in any way.

Understand the value of your estate in advance

Having an accurate idea of your estate value will help you to understand how much Inheritance Tax your beneficiaries are likely to pay.

Remember to account for any debts and funeral expenses when you are working out your estate’s value. It is also beneficial to review this regularly, as the value of your estate is likely to increase over time.

Leaving your property to your spouse/civil partner

If your property is left to your civil partner or spouse, they will not pay any IHT and this is applicable across all assets you leave to your spouse or civil partner.

However, if you leave the property to anyone else in your Will, then they may have to pay IHT, if the estate surpasses the threshold.

Residence nil-rate band

If you own a property, you can apply an additional IHT allowance to the basic threshold meaning that the overall allowance can be increased to up to £500,000 but you must meet certain criteria for this.

You must leave the house to a direct descendant, like your children, grandchildren, stepchildren, adopted children and foster children.

If the value of your estate surpasses £2 million, then RNRB is tapered. RNRB decreases by £1 for every £2 that your estate is above £2 million.

How to plan for IHT

There are various exemptions and reliefs available, such as the spousal exemption, which allows you to transfer your entire estate to your spouse tax-free, and the business property relief, which can reduce or eliminate the tax owed on a family business.

One of the most critical considerations in succession planning is timing. It’s essential to plan well in advance, as this will give you time to make the most of any available tax reliefs and exemptions.

If you need advice on IHT, your obligations and succession planning, contact us today.

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