When it comes to succession planning in family businesses, there are many factors to consider, including the potential impact of Inheritance Tax (IHT).
IHT can be a significant expense for families transferring wealth to the next generation.
However, with careful planning, it is possible to minimise the tax burden while still ensuring a smooth transition of ownership.
When is IHT due?
When someone passes away, their estate may be subject to IHT if it exceeds the tax-free threshold of £325,000 (currently frozen until April 2028).
However, in many cases this value may be different, such as when the residence nil-rate band applies. This can increase the tax threshold by £175,000 to £500,000 where a person’s main property is passed to a direct descendant.
The value of your estate includes various assets such as property, investments, and savings.
If the value of the estate surpasses the thresholds above and you haven’t made use of additional reliefs, such as gifting, the IHT rate of 40 per cent will be applied to the excess amount.
If you are married or in a civil partnership and your spouse passes away, any unused IHT allowances can be passed to you.
However, there are several exceptions to these rules, and it’s crucial to keep track of the estate’s value regularly to determine if IHT will apply.
If you suspect that your estate will be subject to IHT and your beneficiaries will be responsible for paying it from the proceeds of your estate, it’s essential to understand the costs involved and explore ways to plan ahead and minimize the impact of these costs.
The Residence Nil-Rate Band explained
Firstly, you must have lived in the property at some point after 8 July 2015. Additionally, the property must be left to a direct descendant, such as a child, grandchild, stepchild, adopted child, or foster child.
If you leave your entire estate to your spouse, you may not make use of your own nil-rate band. Instead, your spouse’s tax-free allowance will double to £650,000.
Similarly, if the additional allowance is not used, your spouse’s allowance will be increased by £350,000 – allowing a total tax-free allowance of £1 million.
If the value of your estate exceeds £2 million, the additional allowance may be tapered. Specifically, the allowance decreases by £1 for every £2 that your estate exceeds £2 million.
We understand that the value of your estate and ensuring it is passed down to your loved ones is of the utmost importance. We are here to guide you through the process and answer any questions you may have.
How to plan for IHT
There are various exemptions and reliefs available, such as the marriage allowance, which allows you to transfer your entire estate to your spouse tax-free, and the business property relief, which can reduce or eliminate the tax owed on a family business.
One of the most critical considerations in succession planning is timing. It’s essential to plan well in advance, as this will give you time to make the most of any available tax reliefs and exemptions.
If you need advice on IHT, your obligations and succession planning, contact us today.