Thursday 5 June 2014

Best will for……..Part 2: Married entrepreneurs

I am lucky enough to meet inspiring entrepreneurs on a regular basis in the course of my work.  Although they are busy building up successful business empires in very different sectors, they all tend to have one thing in common, though.  Their Inheritance Tax (IHT) planning is non-existent!  Yet if they knew what was at stake, their priorities might be rather different.


Having to pay IHT on investment company shares on death can have a serious impact on the company, particularly where the company is closely held.   Having elderly shareholders of these companies is a high risk strategy!  Fortunately for trading businesses and companies, they have the potential to take advantage of that most precious of reliefs – Inheritance Tax business property relief (BPR).  At its most generous, the relief makes unquoted shares in a trading company and interests in trading businesses ‘invisible’ for IHT purposes.  That means that the shares can pass free of IHT to anyone on death. 

It is not uncommon for the entrepreneur to be one half of a married couple, while the other half has no real connection to the business.  Often for incorporated entities, the plan at board level is that, if a director-shareholder dies, the shares passing to their estate will be bought back by the company and the director-shareholder’s family will receive cash instead of shares.

This sounds like a good deal for everyone but it creates a very real IHT problem for the entrepreneur’s family, when shares worth millions are exchanged for cash worth millions after the entrepreneur’s death.  Suddenly, the family’s IHT exposure can change dramatically for the worse.  £5m of trading company shares may have no IHT liability attached to them, thanks to BPR.  The heirs get £5m.  On the other hand, £5m of cash has an IHT liability of £2m.  The heirs get only £3m instead. 

Planning for a tax that takes effect on death will never be a major concern for busy forty- and fifty-something entrepreneurs (although sadly we know from experience that the statistically unlikely happens).  But married couple entrepreneurs can take a quick and simple first step towards their IHT planning.  The entrepreneur should always make a will that leaves any assets qualifying for BPR to a discretionary trust for the benefit of his surviving spouse and family (and ensure that no pre-emption rights will prevent the business interest passing to it).  Then if the business interest is turned into cash after the entrepreneur’s death, it is not such a disaster for IHT purposes.  In effect, the trust preserves the BPR relief for future generations, even after the business interest has been swapped for cash, as assets left in the trust will not suffer IHT at 40% on the surviving spouse’s death.  Provided the choice of trustees has been carefully thought through, the family will have a large pot of wealth in a trust that they can easily dip into. 
Most entrepreneurs want future generations to benefit from at least some of the wealth that their business success has generated.  This simple, will-based planning tool could make such a big difference to the level of retained family wealth but, too often in the entrepreneurs’ wills that I see, it is missing.  And no one is keeping an eye on whether the business is structured to maximise BPR entitlement either.  The IHT relief available to trading businesses is so generous though, that IHT planning should be featuring on more corporate agendas.  Entrepreneurs would be mad to miss out.