What Is A Business Relief Trust?

One of the great things about a trading limited company is that its shares are usually free from inheritance tax as they qualify for a business relief trust, which was formerly known as Business Property Relief (BPR). However, if you leave these qualifying business shares to a spouse, the tax-free status can be lost. Many business owners have a standard will that leaves the shares to their spouse in the event of death, but this could be very expensive if not adequately considered.

Commonly, a spouse might sell the shares once inherited, or there may be a shareholder agreement to sell the shares back to the surviving shareholder upon death. In this event, these inheritance-tax-free shares will be converted into money, and the inheritance-tax-free status will be lost. The loss of the tax-free status means that when the spouse dies, the children might pay 40% of the estate as full inheritance tax.

At Executive Life, we can easily avoid this by using a business relief trust, which can save hundreds of thousands of pounds in some cases and millions in others. Let’s find out more about business relief trusts and the benefits they can bring. 

Understanding A Business Relief Trust – Tax Free Savings

A business relief trust is a discretionary trust created upon death. Its sole purpose is to receive business relief qualifying shares and preserve the business relief status. The beneficiaries of the trust can be the spouse, children, or any other beneficiary, but the key thing is that the shares go to the trust, and not directly to the spouse.

Once transferred to a business relief trust, the shares’ inheritance tax-free status is kept intact. Should the shares be sold, the money would then become a trust asset and still be outside the estate, meaning no inheritance tax is applied, now or in the future.

An expression of wishes can stipulate that the spouse has full access to the trust in life and that any money or assets left upon their death would pass to the beneficiaries free of inheritance tax. This straightforward mechanism can save millions of pounds in tax in some cases and is essential to nearly every business owner.

The use of a business relief trust for inherited assets has many other benefits as well, such as protection from litigation, future divorce, and inheritance tax. It can be used very effectively for both business and personal assets as part of a holistic estate planning plan.

What Is Business Relief?

Business relief, previously known as business property relief (BPR), was introduced to allow trading business assets to be passed down from one generation to the next, tax-free. The purpose of this was to maintain employment and prevent companies with employees from being closed down due to the estate not being in a position to pay the inheritance tax liability, resulting in the loss of, in some cases, many jobs.

The business must be trading, so holding and property companies do not meet the criteria. It also has to have been trading for more than two years and not be listed in any stock exchange, excluding the AIM index,

Other exemptions may apply, so always check with a qualified professional, or seek advice from our team.

Executive Power Of Attorney

A business relief trust is created as part of a diligent executive will; however, this plan is only used upon death. It is much more likely that a Director will become incapacitated during life and need someone to stand in and make decisions for them, which is where a business-lasting power of attorney (LPA) can help. 

It is common to have a power of attorney for your health and private financial life, and this is usually left to a spouse or family member. However, would you also want to leave them with the task of managing the company in the event that you could not?

An executive LPA will detail who manages your affairs and explain how the business should be managed, which can be essential at a very difficult time.

For more information on Executive LPA, take a look at this article.

Protecting Your Assets From Inheritance Tax

At Executive Life, we are experts in advising businesses on a range of issues, such as life insurance, wills, and trusts. We also write many business relief trusts. We offer free guidance and are happy to arrange a call to discuss your case and see if we can help. It’s a no-obligation call designed to provide you with some options to consider.