Protect your legacy: 2 estate planning secrets every business owner should know

Inheritance Tax (IHT) can seriously reduce the amount of wealth that your loved ones will receive on your death.

According to the last available data published in FTAdviser, the average IHT bill in the 2018/19 tax year came in at £209,502. And, in the first quarter of the 2021/22 tax year, Brits paid £2.1 billion in IHT, £500 million more than the same period the year before.

No wonder it’s often called “Britain’s most-hated tax”.

Luckily, strategic financial planning can help you reduce your IHT liability. And, if you’re an entrepreneur, there are additional ways to secure your legacy and ensure that you pass the maximum amount of wealth to your family and loved ones. Read on to find out how.

A quick refresher on the Inheritance Tax rules

The standard rate of IHT is 40% and is charged on any part of your estate that comes above the IHT threshold.

The IHT threshold for the 2021/22 tax year is £325,000. This is called the “nil-rate band” (NRB). On top of this, there’s also an additional residence nil-rate band (RNRB), which allows an additional £175,000, if you pass your main residence to your children or grandchildren.

Combined, these thresholds allow you to pass on up to £500,000 tax-free.

There will be no IHT bill if the value of your estate falls below the threshold, or if you leave anything above the threshold to your spouse, civil partner, or even a charity or community sports club.

On top of this, if you’re married or in a civil partnership, you can pass on any unused NRB or RNRB to your partner on your death, or vice versa if you outlive your spouse.

This means you may be able to pass on up to £1 million without incurring a tax charge.

If your total estate is worth £2 million or more, your RNRB will be tapered by £1 for every £2 over the threshold. This means that if your estate is worth more than £2.35 million, your RNRB could taper away altogether.

2 steps every entrepreneur should take to reduce IHT liability

With all this to consider, a sound estate plan can ensure you take the right steps to reduce your potential liability. Below are just two of the ways you can do this if you’re a business owner.

  1. Use Business Relief to reduce the value of your business

Although owning a business, or shares of a business, is included in your estate for IHT purposes, you can use Business Relief to reduce the value of your business or its assets.

Depending on the type of business asset you hold, you can benefit from either 50% or 100% IHT reduction, which you can pass on during your lifetime or in your will.

Get 100% Business Relief on:

  • A business or interest in a business
  • Shares in an unlisted company.

Get 50% Business Relief on:

  • Shares controlling more than 50% of the voting rights in a listed company
  • Land, buildings, or machinery.

However, you can only use Business Relief if you owned the business or asset for at least two years prior to your death.

There are also some areas where you cannot claim Business Relief, including if your company:

  • Mainly deals with securities, stocks or shares, land or buildings, or in making or holding investments
  • Is a not-for-profit organisation
  • Is being sold, unless the sale is to a company that will carry on the business and the estate will be paid mainly in shares of that company
  • Is being wound up, unless this is part of a process to allow the business of the company to carry on.

It’s also possible to get Business Relief on business property or assets that you gift during your lifetime.

The beauty of this is that it allows you to pass your business on, enjoy your retirement, and still benefit from Business Relief.

Business Relief is a great way for you to reduce your IHT liability, but it can be complicated. To make sure you understand all the ways you can benefit, talk to one of our expert planners about the opportunities it presents for you.

  1. Use your pension to cut your IHT bill

It may come as a surprise, but the pension system makes it simple to pass on unused pension savings to your heirs. This is particularly true if you have a defined contribution (DC), money-purchase plan, or self-invested personal pension (SIPP) which, as an entrepreneur, is likely.

In 2015, new pension rules were introduced. These “Pension Freedoms” govern everything from how you access your pension to what can happen to your pension pot after you die.

Pensions typically sit outside your estate so, when you die, your beneficiaries can access your retirement savings without having to pay IHT.

If you die before age 75, your heirs are entitled to all the money and won’t be charged any tax. If you die after age 75, your heirs still get the cash, but will need to pay Income Tax on the proceeds they receive.

This presents a great opportunity to use your pension as a tax-efficient way of passing wealth on to your beneficiaries.

You can pass your pension assets to your beneficiaries, dependents, nominees, or successors inside the scheme. This is especially useful if your pension is invested in commercial property that your business owns or operates out of.

Since your pension isn’t subject to IHT, you may be wise to draw on other investment vehicles such as ISAs or other assets you hold and leave your pension intact.

Only 32% of over-55s consider using non-pension wealth to generate their retirement income

Few people know that pension savings fall outside IHT. In fact, a study by Canada Life found that only 32% of over-55s are likely to consider using non-pension wealth to generate income in retirement so their pension pot remains untouched.

Estate planning is an important consideration for every wealthy individual. As a successful business owner, it’s wise to plan ahead and talk to an expert adviser. This should allow you time to get your affairs in good order so you can pass as much of your wealth to your family and loved ones without it being eroded by tax.

Get in touch

If you’re concerned that your estate may be subject to Inheritance Tax and would like to discuss steps you can take to protect your legacy, please get in touch. Email hello@firstwealth.co.uk or call 020 7467 2700.


This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.

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