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Wills for Business Owners: Maximising Business Relief
Business assets can constitute a significant portion of an individual’s wealth and is often a key aspect of their estate planning.
Whilst it is generally known that gifts of ‘relevant business property’ can benefit from Business Relief, without careful planning, this relief can be wasted or cause unintended UK inheritance tax (IHT) consequences when an individual holds such assets on their death.
This article focuses on how this relief can be optimised with careful planning and precise Will drafting.
Business Relief
Business Relief reduces the value of ‘relevant business property’, which is subject to IHT on a transfer arising on death (or by a lifetime gift). Depending on the type of property, relief is available at either 50% or 100% of the value of the property.
For deaths and transfers on or after 6 April 1996, there are six categories of property which can qualify as relevant business property:
| Relevant Business Property | Rate of Relief |
| 1. Property consisting of a business or interest in a business | 100% |
| 2. Control holdings of unquoted securities in a company | 100% |
| 3. Unquoted shares in a company | 100% |
| 4. Control holdings of quoted shares in a company | 50% |
| 5. Land, buildings, machinery or plant used by a company controlled by the transferor or by a partnership of which the transferor was a member | 50% |
| 6. Settled land, buildings, machinery or plant in which the transferor had an interest in possession and used in his business (this applies to lifetime transfers only) | 50% |
To qualify for relief, the business to which the property relates must be a trading business. There are additional conditions which must be met for the property to qualify for the relief.
Generally speaking, these are that the property must have been owned by the donor throughout the period of two years before the date of transfer (the ownership condition) and, that whilst a business as a whole may qualify for relief, if it holds assets which are not used in the course of the business such as surplus cash (known as ‘excepted’ assets), then those assets can reduce the amount of relief available.
Gifts By Will
Beneficiaries of a Will generally fall into two categories: ‘exempt’ beneficiaries and ‘non-exempt’ beneficiaries for IHT purposes. Gifts made to exempt beneficiaries are as the name suggests: they are exempt from IHT.
The most common exempt beneficiaries are spouses or civil partners (who benefit from the ‘spouse exemption’) and UK charities (who benefit from the ‘charity exemption’). Non-exempt beneficiaries are any beneficiary which are not afforded a specific exemption from IHT.
To the extent possible, business property should made directly or through the creation of an appropriate trust interest to non-exempt beneficiaries, to ensure that the relief is not ‘wasted’ on an exempt beneficiary whose share of the estate would already benefit from an IHT exemption.
Gifts That ‘Waste’ Business Relief
When qualifying business property is specifically given to a spouse, for instance, this would effectively be a ‘waste’ of the relief, as the spouse exemption already exempts from IHT any assets which pass between spouses. As the relief attaches specifically to the business property, it is not available to be set off against any other part of the estate.
It is, therefore, preferable for ‘non-exempt’ beneficiaries to receive the business property directly or be capable of receiving such property under a suitable mechanism, to optimise the estate from an IHT perspective.
However, notwithstanding the tax savings, individual circumstances need to be borne in mind; the surviving spouse may, for example, have need for the business property, or it may not be appropriate for the non-exempt beneficiaries to receive those assets. In the latter case, a gift of these assets into a discretionary trust in the Will, could provide a solution.
Business Property That Falls Into The Residue Of The Estate
When qualifying business property forms part of the residuary estate, and the entirety passes to an exempt beneficiary, then any available relief is ‘wasted’ in the same way as if the business property were directly gifted to an exempt beneficiary.
However, if the beneficiaries of the residuary estate comprise both exempt and non-exempt beneficiaries, IHT legislation (Section 39A Inheritance Tax Act 1984) operates to apportion part of the relief to the exempt beneficiary, even though the exempt beneficiary may not receive the business property.
Not only is the relief therefore ‘wasted’, it could also result in unintended IHT charges, which could otherwise have been avoided by ensuring that the business property was given to a specific beneficiary (or trust) in the Will.
An Example
Anna dies leaving shares in a business worth £10,000,000. Anna’s other (non-qualifying business) assets amount to £5,000,000. In her Will, she leaves her entire estate to her husband Bob and her son Chris in equal shares absolutely. It is subsequently determined that the business qualifies for 100% Business Relief. Anna has not made any specific gifts, and all her assets including the business, falls into the residue.
Anna’s gross estate for IHT purposes, before the deduction of Business Relief or any exemptions, is £15,000,000.
As Bob and Chris share the entire estate equally, the Business Relief is apportioned equally between them as follows (note that how the assets are actually distributed between Bob and Chris are irrelevant):
| Share of gross estate (before reliefs) | Share of Business Relief | Share of net estate (after reliefs) | |
| Bob (50%) | £7,500,000 | £5,000,000 | £2,500,000 |
| Chris (50%) | £7,500,000 | £5,000,000 | £2,500,000 |
IHT is calculated on the net estate as follows:
On Bob’s share: nil, due to the spouse exemption.
On Chris’ share: £870,000 (£2,500,000 less Anna’s nil rate band of £325,000, multiplied by the IHT rate of 40%).
This would be the position even if the executors decided to distribute the whole of the business to either Bob or Chris.
However, if instead Anna’s Will had included a specific gift of her business to Chris, with the residue of her estate to Bob, the IHT position would have been as follows:
| Share of gross estate (before reliefs) | Share of Business Relief | Share of net estate (after reliefs) | |
| Specific gift of business to Chris | £10,000,000 | £10,000,000 | Nil |
| Gift of residue to Bob | £5,000,000 | Nil | £5,000,000 |
IHT is calculated on the net estate as follows:
- On Bob’s share: nil, due to the spouse exemption.
- On Chris’ share: nil, as his share is fully relieved by Business Relief.
Although Bob has received less as a result of the specific gift to Chris, IHT of £870,000 has been saved.
Conclusion
Individuals who have business assets and interests should give special consideration to these assets when planning their estate, to ensure that any available relief is maximised. There are various complexities to Business Relief, and professional advice should be taken to understand its availability and how to account for it in the context of succession planning.
To discuss any of the points raised in this article, please contact Ben Rosen or fill out the form below.
The Impact of Death and Domicile on IHT
Establishing the domicile of an individual on death is fundamental to determining the exposure and, therefore, liability to inheritance tax (IHT). Often this area is misunderstood and can lead to complexities during the estate administration. In this article, we discuss the various categories of domicile with a particular focus on the statutory notion of deemed domicile.
What Is Domicile?
Domicile is a common law concept that is broadly summarised as an individual’s ‘permanent residence’. Under English law there are three key categories of domicile:
Domicile Of Origin
This is acquired at birth by reference to the parent’s domicile. Typically, an individual takes their father’s domicile status. This status can be displaced by either of the following two categories.
Domicile Of Dependency
A dependent individual acquires the same domicile of the person on whom they are dependent. For example, if a parent acquires a domicile of choice in a different jurisdiction, then the dependent would also acquire the same domicile. Dependent individuals include unmarried children under the age of 16 and mentally disordered individuals.
Domicile Of Choice
To establish a domicile of choice, the following two elements must be evident:
- physical presence in the territory concerned; and
- an intention to reside permanently and/or indefinitely in the territory.
The extent to which an individual is exposed to IHT depends on their domicile status and broadly the outcome is as follows:-
- Individuals who are UK domiciled are subject to IHT on their worldwide estate.
- Individuals who non-UK domiciled are only subject to IHT on their UK estate (ie assets that are considered UK situated for IHT purposes).
Statutory Provisions For UK Deemed Domicile In IHT
There are two key statutory provisions to treat otherwise non-UK domiciled individuals as UK deemed domiciled for IHT purposes:-
- Formerly Domiciled Residents – Applied to individuals who were born in the UK with a UK domicile of origin. These individuals will acquire a deemed domicile status for IHT purposes if they were both a UK resident for the tax year in which the relevant event occurs and they were a UK resident for at least one of the two tax years immediately before this event.
- 15 out of 20 Year Rule – Non-domiciled individuals are treated as UK domiciled for IHT when they have been a UK resident for 15 out of the last 20 years.
The implication of deemed domicile is an important consideration for spouses and civil partners as it can significantly impact the spousal exemption for IHT that is available to them. Transfers from UK domiciled spouses and civil partners to non-UK domiciled spouses and civil partners are not entirely exempt from IHT in the usual way. Instead there is a limited spouse exemption.
Election To Be Treated As UK Domiciled
An option available to non-UK domiciled individuals is, however, to elect to be treated as domiciled in the UK for IHT purposes only. There are three main circumstances when an election can be made:-
Lifetime Election
This can be made where the couple are both alive if the couples are married or in a civil partnership and if at any time on or after 6 April 2012 and at any time during the period of 7 years ending with the date on which the election is the made, the electing spouse or civil partner had a spouse who was domiciled in the UK.
Death Election
This can be made within 2 years of the death of the deceased and if at any time on or after 6 April 2013 and within 7 years ending with the date of death, the deceased was domiciled in the UK and the spouse would by virtue of the election be treated as domiciled in the UK.
Election By Personal Representatives
This can be made by the PRs if both spouses have passed away and if during the 7 years ending with the date of death the deceased individual’s spouse or civil partner, that spouse/civil partner was UK domiciled.
How Can Quastels Help?
We at Quastels have extensive experience in dealing with questions relating to domicile. This includes advising non-UK domiciled clients currently living in the UK, clients who are planning on leaving the UK and clients who are planning to move to the UK.
It is important that a domicile review is undertaken every few years to accurately record an individual’s circumstances and account for any changes that may potentially impact the domicile of an individual.
We often see that clients rely heavily on the Statutory Residency Test and the statutory requirements for deemed domicile and ignore the fact that they could have acquired a domicile of choice before the 15 year rule has applied. We advise that alongside a domicile review, a statement of domicile is prepared and regularly reviewed where there is any potential question of domicile.
For Private Wealth & Tax advice and services, please contact Eleanor Catling via our contact form below.
A Global Standard for Incapacity: STEP’s GRP Proposal and Its Implications
Introduction
Planning for loss of capacity can be challenging at the best of times. Lasting Powers of Attorney (LPAs), or their international equivalents, enable an individual (technically, a donor in the case of LPAs) to appoint representatives (or attorneys) to carry out their wishes should they become incapacitated or unable to make decisions to protect their own interests.
Each jurisdiction has its own regulations and formalities in relation to questions of incapacity and some jurisdictions have no framework in place at all. Even where there is a framework, as with the UK’s system, representatives (or attorneys) often encounter difficulties in obtaining recognition of their LPAs for use abroad, as this article will explore.
An Illustration
Let us consider a donor who works in the UK, as this is where his business is headquartered. The UK is not his country of origin, and nor is it the jurisdiction where his family and most of his assets is situated. His business has offices worldwide and he personally has multiple bank accounts and properties in those jurisdictions too.
This individual has registered both types of LPA (i. Property & Financial Affairs and ii. Health & Welfare), but when he sadly develops an illness which inhibits his decision-making powers, the attorneys discover that the LPAs are not recognised in the other jurisdictions where he operates his business interests and owns assets.
STEP’S Global Representative Power
In an attempt to address this issue, we illustrate above, the Society of Trust and Estate Practitioners’ (STEP) has proposed a model for an internationally recognised power of attorney, with the intention that it may be accepted worldwide.
In August 2023, STEP’s expert members set out their proposal for a so-called ‘Global Representative power’ (GRP). STEP hopes that the GRP will serve as a global benchmark when reviewing or implementing new legislation, particularly in jurisdictions where the laws surrounding cross-border incapacity fail to exist or are not as robust as can be. In effect, this is an effort at achieving harmonisation on questions of incapacity in a manner which reflects and accommodates our globalised world.
The proposed GRP is not intended to replace any existing framework (at least for now), but instead it seeks to offer additional security by capturing the strengths and characteristics of LPAs in a single ‘catch-all’ guide, which if adopted accurately, will enable donors and their representatives, the ease of managing their affairs in a harmonised global manner and without jurisdictional issues.
The GRP is still a template at present, which is likely to be subject to change. The model application forms can be viewed as part of the GRP toolkit published by STEP which includes guidance, considerations, and final certificate templates.
What Does STEP Aim To Achieve With Its Proposed GRP?
STEP conducted a survey in partnership with Alzheimer’s Society last year, which received responses from 756 members in 44 countries. Responses showed an overwhelming demand for further information and international discussion on how practitioners should offer advice to clients seeking to protect their assets, and for greater recognition and portability of LPAs across borders.
The key objective behind STEP’s proposal is to raise general awareness of the considerations behind incapacity and to encourage policy makers to:
- Ensure global legislation is robust and consistent;
- Safeguard against abuse; and
- Educate about capacity and associated planning.
Ultimately, STEP hopes to set a ‘gold standard’ which will be consistent in each jurisdiction. If successful, there is potential that the GRP will set the standard in minimising the time and cost constraints of registering multiple LPAs and appointing different attorneys in different jurisdictions.
Having a harmonious approach to incapacity globally should prevent donors from being left without attorneys in a jurisdiction where LPAs have no effect. In the UK, the absence of an LPA or some global equivalent with effect in the UK, would result in family members having apply, at some cost, to the Court of Protection.
Limitations Of The GRP
The GRP is limited to decision-making relating to property and financial affairs, whereas LPAs can also be used for matters relating to health and welfare. As such, even if the GRP is implemented, clients ought to consider their health and welfare needs in each jurisdiction where they spend any considerable time.
As always, donors should consider their chosen representatives in great detail. An attorney might be competent to manage the affairs in one jurisdiction but may be challenged with obstacles such as language barriers in another. An attorney who is fit to manage personal finances may not be equipped to manage the donor’s businesses. In these situations, it may be more practical to appoint different attorneys in different jurisdictions.
Whilst the GRP may be adopted worldwide, it is currently nothing more than a proposal and has no legally binding effect as things stand. STEP will urge jurisdictions worldwide to consider the GRP as far as possible, but it is down to the jurisdiction interpreting the GRP to ensure that standards are upheld, and suitable legislation is introduced to achieve the GRP’s core objectives.
For these reasons, and until the principles held within the GRP become wholly enforceable, it is still recommended that donors should seek advice on the requirements pertaining to the laws of incapacity, as they currently stand (both relating to property and financial affairs and health and welfare) in each jurisdiction of interest.
Conclusion
There is a long way to go despite STEP’s efforts to address a grey area that is cross-border incapacity, and the uncertainties that currently stand in the way of ensuring donors and their representatives have a thorough and effective process of managing their assets overseas.
Acceptance or even mere discussion of the GRP can be regarded as a step in the right direction. However, guidance may not be enough, and some degree of harmonisation brought about by legal measures is more likely to deliver on these stated objectives.
As matters stand, we continue to advise and recommend clients that the appropriate LPAs are registered, both in terms of assets and health. Further guidance can be found in the following briefing note on LPAs.
For tax and private client advice and services, please contact Ben Rosen via our contact form below.