Business Property Relief – Leaving a Business in your Will
Chris Broome – Chartered Financial Planner
Aside from the family home, shares in the family business can be one of the most valuable assets that a testator has. But leaving these shares in your Will is not as straightforward as you might imagine.
The way you leave business property, and who you leave it to, is influenced by a number of factors, including the availability of Business Property Relief.
Business Property Relief
Business Property Relief (BPR) is available for some types of business property that has been owned for at least 2 years. The relief is 100% for:
- a business or an interest in a business (including a partnership share);
- company shares that are not listed on a recognised stock exchange (AIM is not included in the definition of stock exchange for these purposes).
The relief is 50% for:
- company shares that are listed on a recognised stock exchange if the transferor had voting control of the company immediately before the transfer;
- land, buildings, machinery or plant owned by the transferor personally but used for business purposes by a partnership of which he is a member, or by a company (whether quoted or unquoted) of which he has voting control.
To be eligible for BPR, the business assets must have been owned for a minimum of two years at the time of the transfer. However, if the asset was inherited from a spouse or civil partner, the surviving spouse/civil partner is deemed to have owned the property from the date it was originally acquired by the deceased spouse/civil partner.
In addition, to qualify for BPR, the asset cannot be excluded property. Excluded property includes, amongst other things, investment businesses which wholly or mainly:
- deal in securities, stocks or shares
- deal in land or buildings; or
- make or hold investments.
If you gift your business assets during your lifetime and then die within 7 years of making the gift, Business Property Relief (BPR) will only be available if the recipient keeps the business assets as a going concern until your death.
They can replace the property or assets (such as machinery) with something of equal value for use in the business, but they cannot dispose of it altogether. If they do, BPR will be lost and the value will fall into your estate for Inheritance Tax purposes (this is at a tapered rate if you die within 3 – 7 years of making the gift).
Further, whether you gift or sell your shares during your lifetime, Capital Gains tax will be payable. In many cases Entrepreneur’s Relief puts this at a modest 10% (and in addition you have your annual CGT allowance).
However, keep in mind that if you keep the shares and allow them to pass under your Will, no CGT would be payable – in fact, there would have been an uplift in the capital gains tax base cost to market value at death (i.e. your beneficiaries would be deemed to have acquired them at their value on your death).
It is essential that you speak to an accountant about your individual tax circumstances before making any decisions.
Type of business
The way you leave business property will also be influenced by the type of business you have (sole trader, partnership, limited company) and any restrictions on the transmission of your share.
You also need to consider whether you want to give your beneficiaries an income from the business assets or have them take over the business; and in the case of the latter, which of your potential beneficiaries are capable and a good fit for the role.
Whilst some beneficiaries might be eager to play apart in the family business, they may lack the necessary skills, experience or even personality to take the company forward.
Valuing your share
If you are considering leaving the business assets to one beneficiary whilst compensating other hopefuls with non-business assets, you will need to know what the share is worth. There is no single correct way to value a company and valuations are subjective – a company is only worth what someone is willing to pay for it.
Keep in mind that if the valuer overvalues your business (whilst this might stoke your ego for a while) it could mean your estate will pay more IHT where BPR is not available. Get a realistic valuation and if you suspect overvaluation, get another. You will also need to consider that the value of the business may rise or fall in the future, and the compensation provided for other beneficiaries may therefore be disproportionate.
It is also worth leaving some guidance for your executors on obtaining valuations when you die. Valuing a business is not a job for a solicitor. An accountant is a better choice, or a industry specialist. In any event, your executors should always seek a fixed fee agreement for the valuation rather than a percentage of the value.
Otherwise, the valuer is likely to be generous and this will cost the estate in Inheritance Tax. A further point to note is to avoid asking for a ‘probate valuation’ as this can inflate the charges.
Leaving your share of the business in trust
Another option to consider is using a discretionary trust to hold your business interest on your death. Such a trust can be a huge advantage where your intended beneficiary is your spouse or civil partner. If you leave the share directly to them, it will be covered by the spouse exemption.
However, if they then sell the asset, any unspent cash proceeds will fall into their estate for Inheritance Tax purposes. Further, the proceeds will be exposed to care fees, creditors and even remarriage. They can be quickly used up or pass sideways out of the family, ultimately benefiting someone else’s children or grandchildren.
If instead you establish a discretionary trust containing all assets that qualify for Business Property Relief, the cash proceeds of sale will be held by the trust instead of falling into the surviving spouse’s estate. A letter of wishes can be drafted specifying that the spouse will be the main beneficiary during their lifetime.
After their death, the assets of the trust can be distributed according to your wishes, or they can remain in the trust to protect the interests of other beneficiaries if necessary.
Discretionary trusts can also help deal with change. Even if you plan to leave your business shares to one or more of your children, it is difficult to know what each of your beneficiaries’ circumstances will be at the time of your death.
The trust allows the trustees to decide what is best for the business when you die. Your trustees can select from a number of potential beneficiaries, the most appropriate to inherit or alternatively, they can sell the business interest and appoint out the cash if it more appropriate to do so.
Please note: This article is for general information only and does not constitute advice.