There are many exemptions and reliefs that can reduce the amount of Inheritance Tax (IHT) you have to pay following the death of a friend or relative.
For example, if the person who has passed away owned a business outright or even just a share of it, this may be counted as part of their estate. However, you’ll typically be able to claim some kind of relief on this, meaning that value of the business or part of the business they own won’t be subject to IHT on death.
Reliefs include certain kinds of shares, as much as 100% for ownership of a business, and 50% of machinery and property used strictly for business purposes.
Here is a simple guide to understand how business relief works to reduce any potential liability to IHT.
What is Inheritance Tax?
When someone passes away, IHT is charged on the value of their assets above a certain tax-free threshold. This includes properties, and any savings or investments. This tax is paid by the executor of their will to HMRC.
The current IHT threshold, known as the ‘nil-rate band’, has been set at £325,000 since April 2009 and any assets over this amount are subject to tax at 40%. The Chancellor confirmed in the March 2021 Budget that the threshold would stay at this level until 2026.
You can learn more about how Inheritance Tax works in our guide Understanding Inheritance Tax.
What can I claim business relief on?
You can claim business relief provided the deceased owned the business or assets for two or more years preceding their death. The rules are as follows:
You can claim 100% business relief on a business, interest in a business, or shares in an unlisted company. For a company to be unlisted, it must not be listed on the stock exchange, meaning it will probably have very few shareholders.
You can claim 50% business relief on shares controlling more than 50% of the voting rights in a listed company. You can also claim this relief on land, buildings or machinery owned by the deceased and used for a business they were a partner in or controlled. It may also be claimed for land, buildings or machinery used in the business and held in a trust that the deceased has the right to benefit from.
What can’t I claim business relief on?
There are some exceptions to the rules. You cannot claim business relief if the company:
- Deals mainly with securities, stocks or shares, land or buildings, or in making holdings and investments
- Is not-for-profit
- Is being wound up, unless this is to somehow enable it to carry on its business
- Is being sold, unless it is to a company that will carry on its business (in which case, this will be expressed in the estate as shares in the new company).
You also cannot claim business relief on an asset that:
- Also qualifies for agricultural relief
- Isn’t needed for the business going forward
- Wasn’t used mainly for business purposes over the past two years.
How do I claim business relief for Inheritance Tax?
If you are the executor of the will or the administrator of the estate, you can claim business relief when valuing the estate. There are a couple of forms to fill out:
- form IHT400 (Inheritance Tax account).
- schedule IHT413 (Business or partnership interests and assets).
Bear in mind that you have to use the current market value of the business or asset when calculating relief at 50%. Inheritance Tax can be extremely complicated to get to grips with, so it’s worth seeking professional advice if you’re unsure how to proceed. You can find a qualified chartered accountant in your local area using the Institute of Chartered Accountants in England and Wales’ (ICAEW) directory of chartered accountants.
Do you own a business or shares in one? Have you considered the inheritance tax implications? We’d love to hear from you. You can join the money conversation on the Rest Less community or leave a comment below.