How Business Relief could help you to mitigate Inheritance Tax

In the 2023/24 tax year, HMRC collected £7.5 billion solely from Inheritance Tax (IHT) payments. This is up £0.4 billion on the previous year’s haul of £7.1 billion.

According to official forecasts, the number of families paying the charge is expected to reach almost 44,000 a year by 2028/29, up from 33,000 in 2024/25.

In total, an estimated 200,000 estates will pay the tax over the next five years.

Frozen thresholds are contributing to the huge sums of Inheritance Tax being paid

In part, these record levels of IHT payments is because tax-free allowances have been frozen since as far back as 2009.

There are two IHT allowances you can use to help reduce a potential IHT charge.

· A “nil-rate band” – the amount you can pass on without triggering an IHT tax charge – is £325,000.

· A “residence nil-rate band” of £175,000 – a further amount you can pass on without triggering an IHT charge, if you leave your main home to children or grandchildren.

In effect, these two allowances allow you to pass up to £500,000 on to your beneficiaries free of IHT.

If you’re married or in a civil partnership, you’re able to pass any unused allowance to your partner. This means that by working as a couple, you could pass on as much as £1 million before your estate may be liable to an IHT charge.

Any inheritance you leave above these thresholds is liable for IHT at a rate of 40%.

With both the nil-rate band and the residence nil-rate band frozen until 2008, more people could be pulled into having to pay IHT.

The Labour Party may have Inheritance Tax in their sights

The Labour government could alter IHT rules to raise additional funds – an area that has been muted to help fill the £22 billion “black hole”.

There’s a lot of speculation about what Labour might do, and more details are expected on 30 October 2024, when Rachel Reeves will unveil her first Budget.

Fortunately, there are several ways to mitigate IHT

There are a variety of ways you could mitigate a potential IHT charge on your estate. For example, you might choose to make gifts during your lifetime, give gifts from surplus income, or establish trusts.

Another effective way to reduce the tax that your family may pay is Business Relief. Read on to find out more.

Business Relief has been around for almost 50 years

The government introduced Business Relief in the 1976 Finance Act, with the aim of protecting small family-owned businesses in the event of a death.

Before Business Relief, the beneficiaries of a business may have been forced to sell their shares to meet the costs of a large IHT bill. To prevent this situation, Business Relief protects certain shares and business assets from IHT.

Your family could potentially claim 100% Business Relief on:

· A business or interest in a business

· Shares in a qualifying listed companies

· Shares in an unlisted company.

The rules surrounding what does and doesn’t qualify for relief can be confusing. So, if you’d like to learn more about how you and your family could benefit from using Business Relief, please get in touch.

How your family could use Business Relief to mitigate Inheritance Tax

If you don’t like the idea of gifting large sums of money during your lifetime, Business Relief could be a useful way to protect your estate from IHT.

There are specific products set up for IHT purposes, that have been around for many years that are open to investment, which qualify for this relief.

One of our preferred providers is a household name. It is a simple product that after two years could be 100% free from IHT.

While you should first consider whether you have the appropriate risk appetite, the good news is that some products have very low risk underlying products to somewhat reduce the risk “under the bonnet”.

To qualify for Business Relief, you must have held the asset for at least two years.

For example, if you invest £150,000 in a qualifying company, as long as you’ve held the shares for at least two years, that £150,000 would not be subject to IHT.

If you leave the qualifying asset to your spouse or civil partner in the event of your death, the ownership period will be deemed to commence when the asset was originally acquired.

This rule does not apply if you transfer the asset to your spouse during your lifetime. In this case, your spouse won't qualify for relief until they have owned the asset for two years.

Benefits and drawbacks of using Business Relief

One of the primary benefits of using Business Relief as part of your estate plan is that investments you make in qualifying shares are free of IHT after just two years.

In comparison, giving money away to family during your lifetime, above and beyond the annual gift allowances, would only become IHT-free if you survive for seven years after making the gift.

Another advantage is that, because you’re investing funds in your name, you can still access your money if you need to. Unlike gifting money, you could still access these funds for care or to cover the cost of unexpected needs, should they arise.

You can also have dividends paid to you, which could help supplement your income.

To qualify for Business Relief, you usually need to buy shares in private firms or companies listed on Aim.

One provider we work with also offers life insurance in the first two years to cover a potential IHT charge up to the date it qualifies for Business Relief.

As ever, with benefits, there are also downsides – the biggest of which is that qualifying companies are smaller and so can pose higher risks. As such, you could lose money if your chosen companies don’t perform as well as hoped. You might also lose money if a firm fails.

If you decide to sell your shares, you may find it harder to dispose of them. This could be an even bigger issue if you invest in shares that don’t appear on Aim.

Get in touch

If you’re interested in learning more about how you could benefit from using Business Relief as part of your comprehensive and tax-efficient estate plan, we can help.

Right now, one of the providers we work with have removed all entry fees until 10 September 2024. To take advantage of this valuable offer, please get in touch today.

Email info@mlpwealth.co.uk 020 8296 1799.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

The Financial Conduct Authority does not regulate estate planning or tax planning.