What is a Business Relief Trust?
A business relief trust is a discretionary trust written into your Will that takes assets that qualify for Business relief and ringfences them against Inheritance Tax. There are assets that qualify for 100% relief or some assets that qualify for the 50% relief, the Business Relief Trust is a catch all legal instrument.
A business owner may wish to leave the business to their spouse upon their death. On first death, this would be free of inheritance tax due to the spousal exemption. However, second death should also be considered. If a business qualifies for business relief, it may also pass IHT free on second death (should it qualify for the full 100% relief). But there is the possibility that by the time second death occurs that BPR may not be available, for example:
> The surviving spouse may not want to run their late spouse’s business.
> A business partner may want to buy the deceased’s shares from the spouse.
> The surviving spouse may decide to run the business for a while but eventually sell it on in their old age to retire.
> The business could be run in such a way that Business relief no longer qualifies at the date of death.
All these scenarios lead to an increased Inheritance Tax liability, as an asset which is Inheritance Tax exempt (the business) is replaced by one subject to Inheritance Tax (cash) because Business Relief can no longer be applied.
A business relief trust, which takes all assets which qualify for Business Relief, is often used to combat such a situation allowing a surviving spouse sells the business between first and second death.
The trust is its own legal entity, and it will own the business rather than the surviving spouse. Should the business be sold between first and second death, the surviving spouse’s estate is unaffected as the trust owns owning the proceeds rather than the spouse.
A letter of wishes is usually drafted to state that the spouse is to be treated as the main beneficiary of the trust whilst they are still alive. Upon their death, the letter of wishes could either direct that the trust be wound up and assets distributed to the beneficiaries, or alternatively it could continue to run if there a need to protect assets for any of the beneficiaries.
Other Reasons
Whilst Business relief continues to be available, the business assets can remain in the trust and avoid ongoing anniversary and exit charges, this is applicable where the 100% relief is available. There may, however, be anniversary and exit charges where assets only qualify for 50% relief.
By placing the Business relief assets into a Trust instead of a beneficiary that is IHT exempt (the spouse), HMRC will be forced to decide as to whether the business assets qualify for Business relief. If the spouse inherits outright, HMRC do not need to decide on whether the business qualifies for BPR as the spousal exemption applies. Knowing whether the business qualifies or not can affect the planning that the spouse may wish to make in the future. If the business did not qualify for the relief, they may wish to undertake more lifetime planning than they would if the business did qualify.
The usual benefits of using a discretionary trust will also apply, for example the flexibility to benefit all the potential beneficiaries if the need arises and offering protection from the beneficiaries remarrying and going bankrupt. Property holding Companies DO NOT qualify for business relief.