Are you still the best owner of your Business assets?

As a (slight) silver lining, it occurred to us that should the worse-case scenario prevail and asset values fall, this may be an opportunity for gifting business assets at a time when values are low (with attendant lower inheritance tax and capital gains tax implications). Given the pace of recent developments, by the time you read this, “no deal” may no longer be an issue, but death and taxes remain life’s two certainties, so consideration of gifting will always be in point.

For those that have built up successful businesses over the course of their working lives, there comes a stage where they are forced to confront what will happen when they are no longer around to manage the business. Ideally, there will be some long term succession planning in place to protect the business and mitigate any tax charges associated with passing on the business. This succession planning may include gifting during the lifetime of the business owner or could include planning under the terms of the business owner’s Will.

The starting point for gifting is that as long as the donor retains no benefit in the asset gifted, after 7 years the value of the assets concerned will not be taxed on the donor’s death (a potential saving of 40%) – for business owners however, there are more considerations to take into account in deciding when and whether to gift than would usually be the case.

One important tax break for business owners is ‘business property relief’ (‘BPR’) – an inheritance tax (‘IHT’) relief. This can apply to gifts made during lifetime and gifts made under the terms of an individual’s Will on death. The relief is available at a rate of either 100% or 50% and specific criteria apply depending on the nature of the asset, the length of ownership of the asset, and how the asset is owned and used within business. The latter can be a particular problem if a property used by business is owned separately to the business itself, as this can limit relief to 50% in certain circumstances, and therefore inheritance tax should always be a factor in mind when deciding business structures. When it comes to lifetime gifts, it must be borne in mind that the relief can be clawed back in certain circumstances – particularly if the recipient no longer owns qualifying business assets upon the death of the original owner (amongst other criteria).

In relation to the identity of the recipient of any gift, the business owner may wish to consider how a change in ownership of the business asset may impact upon the control of the business and future decision making. By putting assets in the name of another family member, this can risk the assets being lost as a result of divorce, bankruptcy or an unexpected early death. There are also issues surrounding loss of control if the business owner is the sole or controlling shareholder.
One option to consider for gifts both during lifetime and on death is the use of a trust structure to protect the business assets from the claims of third parties and allow the trustees to retain ultimate control of the assets. During lifetime, the maximum chargeable value an individual can place in trust without incurring an immediate lifetime inheritance tax charge is £325,000, so if lifetime trusts are to be used as part of a long term wealth management strategy, assets of significant value need to be transferred while they qualify for relief (not after sale).

A different option to help with control is to diversify share classes (with different classes of shares having different rights etc) in order that younger generations can be benefited economically without those managing the business losing control.

When considering gifting, the other main tax which must be considered is capital gains tax (‘CGT’). As well as the usual CGT considerations which apply when making a gift (being that a gift will be a disposal of the asset concerned, and that the “free uplift” wiping out lifetime gifts on death will be lost), business owners also need to consider the impact of the gift on any entrepreneur’s relief which may otherwise be available on a future sale.

Lifetime planning takes time and considerable thought to implement and it can greatly benefit families who hold business assets. Gifting is not however always possible nor is it always advisable. Whatever a business owner may decide to do in his lifetime, making a Will should be the first priority, allowing a tax efficient structure to be set up for the future and ensuring that business assets end up in the ‘right’ hands.