UK Inheritance Tax Changes: Business Property Relief & £1M Allowance Explained
As a business owner in the UK, staying informed about the latest tax changes is crucial for protecting your assets and ensuring that your business is passed on smoothly. Recent changes to inheritance tax (IHT) law, particularly around Business Property Relief (BPR) and the introduction of a new £1 million allowance, represent a significant shift in how businesses and their owners will be taxed when passing on wealth.
In this article, our Strategic Tax Adviser, Sanjay Kukar have broken down these recent changes and explain how they could affect your business’s succession planning and financial future.
Business Property Relief: What is it?
Business Property Relief (BPR) is a long-standing feature of UK inheritance tax law that allows for the relief of IHT on business assets. It makes it easier for business owners to transfer ownership of their businesses upon their passing without the burden of large tax bills. There are different rates for this relief, either 50% or 100%, but typically, shares of a trading company were fully eligible for BPR relief. This meant minimal tax planning had to be done when it came to succession planning for business owners.
The New £1 Million Allowance
In a significant development, the UK government has introduced a new £1 million allowance that limits business owners' ability to reduce their IHT burden when passing on their businesses.
How Does the £1 Million Allowance Work?
This allowance allows business owners to pass on up to £1 million worth of business assets without incurring inheritance tax. The new allowance applies to both the value of the business itself and any associated assets, including shares, intellectual property, and physical assets related to the business.
Key features of this new £1 million allowance include:
Per Person Basis: The £1 million allowance is available per individual. For example, if both business owners are involved in the business, they may each be able to pass on £1 million of assets, resulting in a combined £2 million tax-free allowance. However, if the full £1 million allowance is not utilised, it cannot be transferred to the surviving spouse like the nil-rate band.
Why Should Business Owners Care About These Changes?
Previously, entrepreneurs could continue to grow and create new businesses without the worry of significant inheritance tax at the end of the day. Now once their BPR qualifying assets exceed £1 million in value, they will need to start thinking about succession planning to avoid being subject to tax at 40%.
*The residence nil-rateband is available when your net estate is valued at £2 million or below. BPR qualifying assets are not factored into your net estate for this calculation.
How Can Business Owners Prepare?
Now that you understand the basics of the recent inheritance tax changes, here are some tips on how to prepare:
Review Your Business Structure: If you haven’t already, review your business structure to see if you are approaching the £1 million tax-free limit.
Consider the use of Trusts: Like individuals, Trusts have a £1 million tax-free allowance for BPR qualifying assets. Transferring some of your company shares early enough could save you up to £400,000 in inheritance tax.
Consider Future Succession Plans: It’s essential to have a clear plan for passing on your business, whether through family succession or a sale. Multiple tax reliefs are available depending on your future planning, such as business asset disposal relief (BADR) or holdover relief.
Act Early: Inheritance tax is often associated with a 7-year clock. Planning early is imperative to ensure you are not left with a hefty tax bill, even if you have already started restructuring or gifting shares.
Conclusion
The recent inheritance tax changes, including the introduction of the £1 million allowance, present business owners with a new obstacle they need to plan around. By staying informed and planning ahead, you can ensure that your business succession is as smooth and tax-efficient as possible, securing your legacy for future generations.
If you would like to discuss how inheritance tax impacts your personal situation, you can book a complimentary 30-minute call with our tax adviser below.
Speak to one of our Inheritance Tax Advisers today ↓
Join our network of entrepreneurs and benefit from a range of support including an ecosystem of trusted partners, our weekly blog, plus webinars and whitepapers on the leading challenges founders face when scaling businesses.
