Many business owners cultivate their companies over the years and become so invested in the success of the enterprise that handing it off to anyone other than a relative becomes almost sacrilegious.
For these business owners who want to have a legacy with their business, the concerns around Inheritance Tax (IHT) are a palpable threat that could prevent them from growing their business.
It is worth considering what the impact of these fears is and whether businesses can plan around such concerns.
Why are family businesses at risk from Inheritance Tax?
The main challenges facing business owners who are worried about IHT are the controversial changes to Business Property Relief (BPR) and Agriculture Property Relief (APR).
Where once these reliefs provided 100 per cent relief on qualifying assets, there is now set to be a cap of £2.5 million, after which the relief drops to 50 per cent.
This is better than the originally announced £1 million cap, but it is little comfort to many business owners.
The reason these reliefs were so valuable is that businesses tend to have value tied up in assets rather than liquid cash.
This makes paying tax bills challenging and may sometimes necessitate selling important assets simply to keep pace with payments.
When this occurs, there is a fear that the value of the business is undermined by the inability to continue trading in its more profitable form.
How should business owners handle the impact of Inheritance Tax?
The best way to mitigate the impact of IHT is to view your estate in its entirety and calculate the most tax-efficient way to structure it.
Rather than leaving your business shackled to a potentially high IHT bill, it may be possible to gift other assets to lower your overall exposure.
This can also potentially give your beneficiaries a better scope to pay off any IHT bill without eating into the viability of the company.
It is always worth noting that any gifts given within the seven years prior to your death are taxed at a tapered rate and any gifts prior to that are not taxed under IHT at all.
This leaves gifting as the most effective way of disposing of some higher-value assets, thus placing less of a burden on a business.
Some business owners are attempting to reduce the value of their business ahead of their death by cancelling investments and cutting jobs.
This may be unwise as there is little point in driving a business to insolvency to avoid IHT.
Instead, it is better to seek professional financial support to ensure that you are discovering the best way to manage your IHT exposure.
Speak to our team to discover the best ways to manage your IHT obligations.
