Inheritance Tax (IHT) is a tax imposed on the estate of a deceased person. It is levied on the value of the estate before it is distributed to the heirs and paid by the estate prior to any of the assets being distributed. Assets can include cash, investments, equipment, and real estate.
The current tax-free allowance on inheritance tax is known as the "nil-rate band." This is the amount of the estate that is exempt from inheritance tax. This means that if the value of the estate is below the threshold of £325,000, no inheritance tax will be due unless a lifetime gift has been made which uses the nil rate band in the previous 7 years. Anything above the threshold will be taxed at 40% per individual frozen until 2027/28.
The estate can pay Inheritance Tax at a reduced rate of 36% on some assets if you leave 10% or more of the ‘net value’ to charity in your will. (The net value is the estate’s total value minus any debts.)
As well as the nil rate band, there is a residential nil rate band of up to a maximum of £175,000 per person where they leave their home to their direct descendants. The relief is restricted if the value of a person’s estate exceeds £2m. Both the nil rate band and the residential nil rate band are transferable to a surviving spouse if unused on the first death.
Inheritance tax may also be charged on certain lifetime gifts to trusts and on property held in trusts. This article does not deal with those charges.
As a sole trader, your business is not a separate legal entity. This means upon your death, your business assets will form part of your estate, and if this exceeds the £325k threshold will be subject to inheritance tax.
With the rate at 40%, this means the heirs could be liable for a significant amount of tax.
Another business structure is a partnership, where two or more people own and operate a business. In the circumstance of one partner passing away, their share of the partnership assets is subject to inheritance tax again if the value exceeds the current threshold.
A limited company is a type of business entity that is a separate legal identity from its owners therefore, when a shareholder passes, their shares in the business are subject to inheritance tax.
BPR is an important relief that can substantially reduce or even eliminate the Inheritance Tax on qualifying business assets. Eligible assets typically include shares in unlisted companies, sole-trader businesses, and certain agricultural properties. BPR relief can be as much as 100%, promoting entrepreneurship and providing essential support to SMEs by reducing the potential tax burden on business owners and their families.
APR provides relief from Inheritance Tax on agricultural land, buildings, livestock, and related farming assets.
To qualify for APR:
Qualifying agricultural properties typically benefit from 100% APR, exempting their agricultural value entirely from Inheritance Tax. However, APR applies only to the agricultural value, not the potential development value. In some cases, BPR may cover additional values or non-agricultural business assets.
The full 100% relief for combined APR and BPR is limited to the first £1 million. Amounts exceeding this threshold receive a reduced relief rate of 50%.
Gifts made during your lifetime could still incur Inheritance Tax if you pass away within seven years after making the gift. However, taper relief reduces the rate of Inheritance Tax payable on gifts, with the amount decreasing progressively the longer you survive after gifting.
Inheritance Tax can substantially impact SME and family-run businesses in the UK, making careful planning essential. To effectively manage your potential tax liability and ensure the maximum benefit from available reliefs, it is crucial to seek professional advice tailored to your unique circumstances.
Most fundamentally, ensure you have an updated will clearly outlining how you want your estate distributed. Our experienced tax professionals can help you plan your estate strategically and tax-efficiently, safeguarding your legacy and the financial security of your heirs.
Contact our expert tax team today to discuss your situation and secure your peace of mind.
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