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Structure assets in the business to keep the tax man at bay

There are ways to shelter assets to protect them from Inheritance Tax. Tony Byrne (pictured), managing director of Wealth & Tax Management, explains.

MANY SME business owners are aware that their trading businesses become free of Inheritance Tax after two years of ownership.  However, not all of them realise that by building assets within their businesses – typically bank deposits and properties – they may well be jeopardising the ability of their business to claim 100% business relief against IHT if they were to die after two years of ownership.  Why is this?

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There are two main types of businesses – trading and investment businesses.  Business relief against IHT is only available for trading businesses, not investment businesses.  The problem is that trading companies can unwittingly become primarily investment companies if they accumulate assets such as investment properties and large bank balances. Sometimes such companies cease their trade completely and become 100% investment companies.

When the owner dies, HM Revenue & Customs will calculate how much of the value is comprised of the trade and how much of it is investment and only the trade element will qualify for 100% business relief.  A big disappointment for the beneficiaries of the estate.

So how do you overcome this challenge?

The simplest thing to do is not to allow large non-trading assets to build within the business by distributing surplus profits to the shareholder/s.

A smarter way is to structure your business in such a way that the assets within it are bona fide business assets thus not jeopardising the business relief rules.

For example, if the trade of the business is a hotel then owning hotels are classed as business assets.  After all you cannot run a hotel without owning or renting a building!  If you have surplus cash then you could turn your business into a finance company and become a lender.  You may even be able to argue that a large bank balance is simply needed for working capital.

  • For advice on tax mitigation for your business, take advantage of a one-hour Discovery Meeting either at our offices or by a video conference call at our expense worth £270 to each of the first three readers who contact us before September 30. You know it makes sense… We offer a great cup of coffee too. Ring us on 01908 523740 or for free on 0800 980 4516 or email wealth@wealthandtax.co.uk.

The Financial Conduct Authority does not regulate tax planning. The contents of this article are for information purposes only and do not constitute individual advice. You should always seek professional advice from a specialist. All information is based on our current understanding of taxation, legislation and regulations in the current tax year.  Any levels and bases of relief from taxation are subject to change. This article is based on my own observations and opinions.

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