Addressing your business’s succession plan and personal Inheritance Tax (IHT) liability is pivotal when managing wealth in a corporate context. The first step to ensure your corporate wealth is managed effectively happens when a business is established.
From an IHT perspective, it is essential to note that instead of the usual 40 per cent IHT exposure when the value of an estate exceeds the applicable Nil Rate Band allowances, ensuring that your estate secures Business Relief (BR), for instance, can reduce or even eradicate an estate’s IHT liability in specific scenarios.
Conducting a Comprehensive Assessment
In addition to understanding your intentions for your business, the first step to any estate plan will be to comprehensively review the value of your estate to understand the assets (including business interests), liabilities, and any tax implications involved.
Ensuring that you and your business have a plan during and after your lifetime are equally essential components in corporate planning.
Lifetime Planning and Safeguarding Your Business Interests
Ensuring that you have a valid Will in place is essential. Without a Will, the Intestacy Rules will apply to your estate, which may result in your business interests passing to an unintended beneficiary, jeopardising your business’s continued operation. A Will directs your estate to your chosen beneficiaries and ensures that appropriate individuals are appointed to administer your estate to facilitate a smooth transition or sale of your business interests.
If your business is co-owned, ensuring an appropriate shareholders or partnership agreement is equally important as making a Will. Such an agreement can govern how shares or interests may pass on death to avoid uncertainty. It may also be appropriate to put a “cross-option” agreement in place to provide an option to surviving shareholders to buy the deceased’s shares. Such an agreement would usually be supported by a life insurance policy to fund the purchase of shares from the deceased’s estate.
A Business Lasting Power of Attorney is another essential legal document that affords you more control over corporate decisions within your lifetime should you lose capacity. Creating such a document will allow you to choose individuals to make critical business decisions on your behalf. This, in turn, helps ensure the preservation of your business.
Continued Succession Planning and Reducing Inheritance Tax
Measures to reduce inheritance tax extend beyond lifetime planning. As indicated above, BR is one of the more generous allowances offering a 50 per cent or 100 per cent exemption against IHT. If your business wholly or mainly trades (as opposed to holding investments), you have owned your interest in the business for more than two continuous years, and there is no agreement to sell it, your enterprise may qualify for a total exemption from IHT.
Incorporating specific trust structures best to use the BR IHT exemption within your will is an effective way to flexibly plan for the business’s future and safeguard your commercial interests upon death. Such a trust structure can also provide ongoing tax planning opportunities for your family after your death.
Philanthropy can also play a role in your overall IHT plan, as should you decide to leave in excess of 10 per cent of your estate to charity via your Will, the rate of IHT will reduce from 40 per cent to 36 per cent.
If your business generates significant income that is not otherwise re-invested, gifting during your lifetime can be a valuable tool to moderate any surplus income when managing your wealth for IHT purposes. Such gifts can either be made outright to chosen beneficiaries or via a discretionary trust structure.
Conclusion and Seeking Professional Guidance
Taking legal and financial advice as part of your estate planning strategies can help protect any wealth that you may wish to leave to others. As I have outlined, giving thought to IHT mitigation can be crucial in efficient succession planning when anyone sets up a business. The structures and mechanisms I have discussed are just some of how you can preserve your wealth for future generations.
This article is one of three, and In my next article, I will deal with the next possible stage in the corporate life cycle – ‘planning to sell’.