Having a current Will is important, especially so for those that own a business. However, not everyone realises this, meaning it’s something that often gets put off. 
Wills need renewing, and several specific circumstances make the matter more urgent, including getting married or entering a civil partnership; on divorce or separation; when a spouse or civil partner dies; if children or grandchildren come along; if children predecease the person with the Will; and where a business is sold.

Importance to business owners

For Elaine Skelton, Director at BHP, it is essential for those running their own business or who are a director of their own company to have a Will. As she notes: “Without a Will, their estate will follow the intestacy rules, and business assets may be inherited by a spouse or family member who knows nothing about the business and does not have the skill, knowledge, or appetite, to run it.”

Worse, she points out: “Partnerships, on the death of a business partner if there is no Will and partnership agreement in place, could be dissolved automatically.”

A Will, if correctly drafted, can be used for tax planning too. And as part of the planning process, steps may be taken to ensure business assets qualify for Business Property Relief (BPR) which exempts business assets from inheritance tax (IHT).

In trust

Skelton highlights another option: “If the Will is drafted in a particular way, it is possible to reduce the overall IHT liability payable by the estate.” She says that this is done by putting BPR assets into a trust so that no IHT liability would be payable because of the availability of BPR. 

The surviving spouse or other family members would be able to benefit from the trust’s assets, but the value of the assets would be outside their estates. All other assets chargeable to the IHT would be left to the spouse and family members. They could then use these chargeable assets to purchase the business assets from the trust.

And, once the BPR assets have been owned by family members for two years, BPR would once more be available on the business assets, making them again exempt from IHT. 

But even where a business owner has a Will and leaves their shares tax efficiently, Skelton warns that they “should also ensure that they also have a shareholder or partnership agreement in place to ensure that the estate is dealt with properly.”

Where a Will leaves shares, or business or partnership interests to anyone other than business partners, Skelton recommends a cross option agreement to ensure that the “surviving business partners have sufficient funds to purchase the shares from the deceased’s family members under the terms of the shareholder or partnership agreement.”

Nil rate bands

Another consideration for trusts is the family home. Here Skelton says to “ensure that the correct type of trust is used so that the Residence Nil Rate Band (RNRB) remains available.”

She explains that the Nil Rate Band (NRB) is presently £325,000 per individual, and is the amount of the estate which is effectively exempt from IHT. This amount is available every seven years, so it is possible to make substantial gifts to the family every seven years to reduce the eventual IHT bill.

In addition, a RNRB of, currently, £175,000 per person, is available if an estate is closely inherited by children and grandchildren. But, as Skelton cautions: “this is only available if an estate is less than £2 million. If an estate is greater than this, then the RNRB is reduced by £1 for every £2 the estate is over this limit.” This means that a married couple or civil partners have total exemptions of £1 million before any IHT is paid if their estate is below £2 million.

Lastly, and back to the trust, its assets remain in the estate of the surviving spouse, but further Will planning can be undertaken with the surviving spouse to mitigate any IHT liability. In simple terms, Skelton says that “a Will can be used to pass assets down the family line in a tax efficient manner by utilising the spousal exemption at first death so that the spouse inherits everything without an IHT deduction.” 

After first death, she says that further Will planning can again be undertaken to pass gifts to the family to reduce the IHT payable at second death.

Summary

Careful Will planning can ensure that reliefs, together with BPR, are maximised and can significantly reduce IHT liability, while ensuring assets are inherited exactly as an individual would wish.