Why Business Owners with Over £1M In Share Value Should Consider Trusts for Inheritance Tax Planning
Chris Broome – Chartered Financial Planner
In the October 2024 UK budget, the government introduced changes affecting inheritance tax (IHT) for business owners, especially those with businesses worth more than £1 million. This new limit on tax-free transfers has heightened the need for robust estate planning to ensure business assets can pass to the next generation without significant tax burdens.
A key strategy for safeguarding these assets is the use of trusts. Trusts offer business owners a flexible and tax-efficient means of transferring wealth, particularly in cases where an estate exceeds £1 million. Let’s explore why this approach has become so important and how a well-structured trust can protect your business interests for future generations.
Understanding the £1M Tax-Free Transfer Limit for Businesses
As of the 2024 budget update, a £1 million cap now applies to tax-free transfers of qualifying business assets upon death. Previously, Business Relief allowed for broader tax exemptions, but this recent change means that any assets exceeding £1 million may now be subject to IHT if transferred directly. Given the 40% inheritance tax rate on assets exceeding the available tax-free thresholds, the potential tax liability could be substantial.
This change is particularly relevant for businesses that do not qualify for full IHT relief. Therefore, business owners need to consider solutions that ensure assets are preserved and transferred in a tax-efficient way. Trusts provide an effective tool to help mitigate these IHT challenges, particularly when ownership is split between spouses.
How Trusts Can Help Married Business Owners with Joint Ownership
For married business owners who each own 50% of a business, the new tax-free transfer limit requires careful planning upon the death of the first spouse. Without proper planning, the surviving spouse’s estate may face an additional IHT burden on the second death. Here’s how a trust can help:
1. Using a Trust to Preserve the Deceased Spouse’s Share
Upon the first spouse’s death, their 50% shareholding can be placed in a trust for the benefit of the surviving spouse and the children. This structure allows the surviving spouse to continue receiving income or dividends from the business share without it formally entering their estate. By doing so, the deceased spouse’s share does not add to the surviving spouse’s estate value, thus preserving it from IHT on the second death.
In essence, this approach creates a layer of protection that allows the business share to pass to the next generation without the need for additional taxes. Since the trust assets do not become part of the surviving spouse’s estate, they are effectively shielded from further inheritance tax charges on the second death.
2. Ensuring Support for the Surviving Spouse and Future Generations
One of the primary benefits of this arrangement is that it provides financial security for the surviving spouse while protecting family wealth. Through the trust, the surviving spouse retains access to income from the deceased’s business share, but the asset itself is ring-fenced for children or other beneficiaries. This approach helps preserve family wealth across generations, offering a balance between immediate financial support and long-term estate planning.
Key Benefits of Using Trusts for Business Owners with Estates Over £1 Million
1. Tax-Efficiency
By placing a portion of the business in a trust, you ensure that the value of the deceased’s share doesn’t become part of the surviving spouse’s taxable estate. This approach can significantly reduce the family’s overall IHT liability, especially for estates that would otherwise exceed the £1 million exemption limit.
2. Preservation of Wealth
Trusts provide a means of protecting assets for future generations, ensuring that your business legacy remains intact for your children or grandchildren. With a trust structure, you can outline the terms for how and when your assets should be distributed, offering flexibility and control over wealth transfer.
3. Asset Protection
A trust also shields assets from creditors, financial claims, or unforeseen future expenses. This ensures that the business share set aside for the family remains secure, regardless of potential risks facing individual beneficiaries.
4. Control and Flexibility
With a trust, you can tailor the terms to suit your family’s unique needs. For instance, you could specify that your spouse can access dividends or income from the business share during their lifetime, while the principal asset remains in trust for your children’s future benefit. Trustees, often appointed by you, can manage the trust in alignment with your family’s best interests, ensuring your wishes are honoured over time.
Practical Steps for Implementing a Trust-Based Strategy
If you’re considering the use of trusts to optimise inheritance tax efficiency, it’s important to seek expert advice and take action sooner rather than later. Trust planning can be complex, and working with professionals who specialise in estate and tax planning will help ensure you maximise the benefits of this approach.
Here are a few steps to get started:
1. Evaluate the Value of Your Business and Estate – Assess the current and projected value of your business to understand your IHT exposure.
2. Determine Trust Structure and Beneficiaries – Decide which type of trust is most suitable and who should benefit from the assets held in the trust.
3. Consider Appointing Trustees – Trustees play a key role in managing the assets within the trust, so choose individuals you trust to uphold your wishes.
4. Create a Will and Trust Documentation – Ensure your will and trust documents are aligned, reflecting your intentions and accurately detailing how your business assets should be handled.
Final Thoughts
The 2024 budget changes mean that business owners with estates worth more than £1 million need to take proactive steps to protect their wealth from inheritance tax. By using a trust, married business owners can prevent their business share from entering the surviving spouse’s estate, ensuring that assets are protected from IHT on the second death.
Trusts offer flexibility, control, and significant tax advantages, making them an invaluable tool for those looking to secure their family’s financial future. Taking steps now to implement a trust can make all the difference, ensuring that your hard-earned wealth is preserved for generations to come.
Questions?
Please get in touch if you have any questions about the above or what it might mean for your financial plans.
Please note:
The content of this blog is intended for general information purposes only.
Tax planning is not regulated by the Financial Conduct Authority.
