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I run a UK business with my two siblings. Our plan had always been that when one of us passes away, the business would be left to the two surviving siblings. However, with the proposed inheritance tax reforms kicking in next year, we now face the very real prospect of having to sell the business when one of us dies if we cannot find a way to fund the inheritance tax. What are the best options available to us?
Gareth Walliss, partner at Stevens & Bolton, a law firm, says that this situation is one many people find themselves in — having built a business on the expectation of being able to pass it on without its commercial viability being threatened by tax burdens, they now face a different outlook.
At this stage we have not seen the proposed legislation that will bring about the changes to business property relief (BPR) from inheritance tax (IHT) and so it is too early to plan with certainty. However, we have the benefit of a consultation on some aspects of the changes, launched by HM Revenue & Customs in late February. That gives us enough to begin thinking about key questions for this situation.
First, what are the values of your individual interests in the business? BPR is being reduced in scope, but not abolished. The consultation suggests everyone will have an allowance of £1mn of assets which will qualify for 100 per cent relief. You will be able to apply your nil-rate band of £325,000 each against the gift as well. This may be sufficient to allow you to leave your interests to each other without IHT arising.
Alongside this, could you make gifts to spouses to take advantage of their BPR allowance and nil-rate bands too? At the same time you would want to ensure that your business’s constitution provides suitable controls over who can receive shares upon a death. A shareholders’ agreement or cross-option arrangements might be needed.
If an IHT bill is unavoidable, then you could consider managing the charge by paying in instalments over 10 years. The current indication from the government is that an interest-free instalment option will be available on all BPR qualifying property.
Finally, might you be able to arrange policies of life insurance on each other which pay out sufficient sums on your deaths to meet the tax? Your ages, health and the amount of cover needed will dictate how affordable this is, but when structured correctly, insurance can be very tax efficient and is an immediate source of liquidity after a death. Paying the IHT bill in one go in turn relieves the cash flow pressure on the business.
Planning early and in conjunction with your co-owners rather than in isolation will be crucial to ensure that your business can still endure in the way you and your siblings have hoped.
How can we protect our daughter once she inherits our estate?
My only daughter is single and in her early thirties. She suffers from a type of number blindness and has little appetite or ability for maths. My wife and I are in our 70s. Our estate is modest, but will cause her difficulties, as we own two properties and several trust funds, shares and savings. What protection can I provide in the inevitable event that she inherits, to avoid her making poor decisions or being scammed by unscrupulous operations?
Julia Abrey, head of elder law at law firm Withers, says there are three possible routes to provide the protection for your daughter and your assets for her benefit after your deaths. The routes are not mutually exclusive; more than one can be put together to create a bespoke solution.
First, you could consider setting up a lasting power of attorney, a legal document that allows you to appoint someone you trust (the “attorney”) to make decisions on your behalf if you lose the capacity to do so yourself, either regarding your finances and property or your health and welfare. Although you mention your daughter’s “figure blindness”, you do not mention that she has any other type of learning disability. She may well have the mental capacity to grant a lasting power of attorney (LPA) for finance; a document under which one or more individuals act as her lawyer in dealing with her financial matters which the attorneys can continue to use should your daughter be unable to deal with her finances herself in future. An LPA can only be made by a person with the capacity to understand it and the powers of attorneys under it — which are considerable.
Many donors and attorneys work well together in partnership. Your daughter continuing to make her own financial decisions while she has capacity but supported by her attorneys to make sensible and appropriate investment and management decisions. Attorneys can be friends of the donor but can also be professionals with special skills to deal with the kind of assets you outline; property and trust funds.
Another option is holding assets in trust for her. You and your wife could restructure your wills so your daughter’s inheritance, instead of passing to her outright, is held in a trust.
Various types of trust are available, but one for you to consider in your daughter’s situation is a disabled person’s trust (DPT). The qualification is based on being in receipt of certain benefits — for example personal independence payment — or having reduced mental capacity such that they cannot deal with their property and financial affairs. It would be sensible to review whether your daughter would qualify.
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Your wills would leave your assets in the DPT and specify its trustees. A DPT has a favourable tax regime for income tax, capital gains tax and inheritance tax. Your daughter would be the primary beneficiary on a discretionary basis during her lifetime; funds from the trust could be made available to her by the trustees but she would have no “right” to them; the assets of the trust would not be treated as hers for the purposes of being taken into account for her means tested state benefits.
Finally, as well as both of the above options you might also consider a simplification of your own finances so that whether they are held in trust for your daughter or she inherits them outright, they are easier to deal with.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
Do you have a financial dilemma that you’d like FT Money’s team of professional experts to look into? Email your problem in confidence to money@ft.com.
