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Estate planning for business owners

Estate planning is an important process for business owners looking to secure their financial legacy and ease the future burden on their loved ones. With thoughtful planning, you can protect your business and personal assets, minimise exposure to inheritance tax, and make sure your legacy endures the way you envision…

Simplifying inheritance tax

Inheritance Tax (IHT) is applied to the estate of someone who has passed away, including all assets such as commercial properties, company shares, and other business-related investments. For business owners, the tax becomes applicable when the estate surpasses government-set financial thresholds.

Significant tax rates are imposed on the portions exceeding these limits, though mitigating strategies can be employed. For instance, strategic estate planning and timely asset transfers to surviving spouses can reduce tax liabilities.

  • Nil-Rate Band: Each individual has a £325,000 nil-rate band, below which no IHT is charged. If your estate’s total value is under this threshold, it passes tax-free.
  • Residence Nil-Rate Band: An additional threshold applies if you leave your primary residence to direct descendants, potentially raising the tax-free limit to £500,000 per person. For married couples and civil partners, this amount can combine to make up to £1 million, using spousal transfer allowances effectively.
  • Tax rates: The standard IHT rate is 40% on amounts over these thresholds. However, rates might lower if you donate a portion of the estate to charity or other eligible reliefs.

Estate planning techniques

Good estate planning involves more than just keeping your will current. Trusts play an important role in how your assets are handled and can significantly reduce your tax burden. For instance, bare trusts hold assets in a trustee’s name for someone else’s benefit and are generally exempt from IHT if set up at least seven years before your death. Discretionary trusts allow trustees to distribute assets among beneficiaries strategically, helping to effectively manage IHT liabilities.

To optimise your estate for IHT and ensure your wishes are fulfilled, consider these strategies:

  • Wills and trusts: As previously mentioned, regularly updating your will ensures that your assets are distributed according to your current wishes. Trusts can be an excellent tool for specifying how and when your assets are passed on. They can also provide significant tax benefits and protect your assets from legal disputes or creditors.
  • Lifetime gifting: This strategy involves transferring parts of your wealth while you are still alive, potentially reducing the taxable value of your estate. Keep in mind the seven-year rule, as gifts made within this period may still be included in your estate for IHT purposes.
  • Business asset relief: Business owners can reduce IHT on business assets significantly. This relief is crucial for those wishing to pass their business onto the next generation without a hefty tax bill.

The importance of regular updates

The world of estate planning is always evolving, which means you should regularly review your estate plan. This helps ensure your plan is effective under current regulations and meets your current wishes.

At BK Plus, we are dedicated to offering customised solutions and strategic approaches to reduce your inheritance tax impact and safeguard your business legacy for future generations. Reach out to our team today to explore your options for inheritance tax planning.

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