These latest changes announced over Christmas week have increased the allowance for business and agricultural property assets from a £1m allowance originally planned to a higher allowance of £2.5m in the most part aiming to protect family run farms from falling into the inheritance tax net on death of a family farmer.
This is a welcome change. The higher allowance applies to businesses as well as farms but it seems clear that farms are intended to be the primary beneficiary rather successful Business owners running small to medium size enterprises such as family firms built up through successive generations or a founder seeking to scale up before exit or sale.
In recent months we have been speaking to business owners about their plans and sharing stories and experiences over a series of lunches, providing the opportunity to educate, support and encourage appropriate action.
One startling observation is how little analysis has been done at board room level on the consequences for business continuity of the untimely or even expected death of any of the major shareholders. This is a concern because, for the first time in a generation (BPR has been available at 100% since 1996), businesses may face difficult choices about their ability to fund the liabilities of their shareholders to pay this tax on the value of the company shareholding. This analysis remains important even with the change of the proposed rules.
We shouldn’t be surprised at this observation as, in truth, for so many years, a ‘do nothing approach’ has been the best strategy for business owners.
So what are the emerging options and what are the majority of business owners planning to do?
Four options have emerged and the choice of each is very personal and individual to the circumstances of each shareholder including importantly understanding the value of the assets in question:
1. Do nothing and ride it out
As all good ostriches will tell you, sticking your head in the sand when in danger is at least one option open to you — followed by a large dose of ‘hope for the best’. Much conversation centred around the possibility of waiting it out until a change of government.
The hope of a possible repeal as we have now seen with the recently announced increase in the allowance means the new rules apply an effective inheritance tax charge of 20% on the company valuation above the £2.5m allowance permitted per shareholder.
The ‘do nothing’ approach avoids time being wasted and expensive costs of advice and, indeed, difficult conversations with family members around who should own and control the business. Whilst there is a limited body of evidence of successive governments reducing the income they will earn from tax this topic remains a political football and indeed may be the subject of future promises in political manifestos … who can say?
2. Gifting shares and creating trusts for the benefit of others
Under current rules, the government has left the potential for taxpayers to give away their shares and avoid future inheritance tax, assuming seven years have passed and there has been no reservation of benefit of the shares in that period. Where family circumstances warrant this, and where the primary controller of the business can continue to support business decision making, this can be an effective choice. Likewise, creating a trust into which the shareholding is placed is a practical way to move the asset outside the estate of the business owner. It would give discretion to appointed trustees to manage the shareholding and may mitigate the tax liability over time. Both of these options will remain beyond April 2026; however, the urgent issue right now is that the amount that can be placed into trust will be limited to £2.5m every seven years from the new tax year. Formal tax advice should be sought when making gifts or establishing a trust.
3. Obtain life insurance to meet a future tax liability
A further choice is to take out insurance on the life of the shareholder. This creates a pot of money on death to pay the tax as it falls due. It requires careful planning to ensure the policy proceeds remain outside the estate of the deceased. It is often considered the easiest way to prepare for the tax, assuming that the shareholder is healthy enough to obtain insurance. The downside is that paying premiums on life cover for the rest of your life can feel expensive, albeit that in virtually every case the amount paid in insurance premiums will be considerably less than the total liability to inheritance tax.
4. Leave the country.
A much-discussed option would be to remove yourself and, if possible, your assets from the spectre of the UK tax net by going to live outside the UK. The change to the rules to abolish non-domicile status from tax treatment means that residence is now the key factor. To remain outside the UK for ten complete tax years allows individuals to remove themselves from the UK inheritance tax net on non-UK situs assets, opening up the possibility of placing UK company shares into offshore vehicles as a planning option. This appears to be a simple question of leaving the UK and one you read about every week. That said, it is a serious decision not to be taken without full assessment of the consequences, not just on your tax position — potentially swapping one jurisdiction’s tax liabilities for another — but also for the social and cultural implications for you and your family personally. For example, would you wish to return to spend time with family, educate future generations or take advantage of the healthcare benefits in the UK in later life?
At the end of each discussion, we have been encouraging greater positivity for British businesses for the future and, in truth, this bears repeating against the gloom of additional tax and administrative strains. Happily, our guests continued to argue that the UK is one of the best jurisdictions globally in which to set up and run a business.
There are countless reasons for this, from corporation tax rates at 25% being below personal tax rates, capital gains tax untouched at 28%, and a stable currency and positive interest rate outlook. Our guests concurred that the economics continue to support business growth. A sound legal system to access finance in private and public markets, an educated and skilled workforce, and sound accountancy and technical support make for a positive business environment. Encouragingly, these facets continue to attract talent from overseas to start up businesses under enterprise investment and venture capital banners which continue to be supported by government.
What our conversations have taught us about planning for business property relief changes is that there is no easy answer or silver bullet and in truth the target also seems to be moving.
Each and every case should be considered on its merits. If taking good advice or sharing experiences is something that would help your situation, please do get in touch at Weatherbys Private Bank to open up a conversation.
One thing is for certain — we cannot underestimate the importance of continued investment and growth in the business community. The UK’s many small and medium-sized companies provide the livelihoods for millions of people working in those companies and will remain the lifeblood of our economy for the years ahead.
Important information
Tax laws are subject to change and taxation will vary depending on individual circumstances. Specific advice should be taken before implementing any tax planning.