Inheritance tax involves careful planning and consideration. With the help of our accountancy experts, we will guide you through the process of inheritance tax and help you secure the future of your small business for future generations.
See our guide to discover more inheritance tax advice as we answer any questions you may have below, from ‘what is inheritance tax’, to ‘what sort of inheritance tax planning should I consider’. Read on to find out more for your small business.
[H2] What is inheritance tax?
Inheritance tax (IHT) is a tax amount which may be paid on an estate when you pass away. This includes property, possessions and money that will be passed onto anybody you choose who is stated in your will.
Paying inheritance tax reduces how much value will be passed down to your chosen beneficiaries –i.e., the people who you choose to leave your money and assets to when you pass away.
[H2] When do you pay inheritance tax?
Inheritance tax must be paid within six months of your passing, and for late payments, additional charges on late payments will be required.
To ensure sufficient funds are available for the IHT to be paid, the inheritance tax must also be paid before any chosen beneficiaries inherit the estate or small business left to them.
[H2] What is the inheritance tax threshold?
In the UK, estates valued at £325,000 or less fall below inheritance tax threshold, meaning no inheritance tax is due. You may still need to report the estate’s value even if it falls below the threshold value.
[H3] Are there exemptions from the inheritance tax threshold?
There are other exemptions to the inheritance tax threshold. For example, if you leave your estate (including the £325,000 threshold amount) to your spouse, civil partner, a registered charity, or a community amateur sports club, it will also be exempt from inheritance tax.
If any assets have been given away to children, including adopted, foster, stepchildren, and grandchildren, the inheritance tax threshold amount can increase up to £500,000.
Although there are exemptions and reliefs in plan to help reduce the amount of inheritance tax paid, it’s important to understand the tax nil-rate band that is put in place to help reduce these costs.
[H2] What is the inheritance tax nil-rate band?
The inheritance tax nil-rate band is a personal inheritance tax allowance. Although anyone who inherits an estate has an IHT allowance of £325,000, they are still liable for any assets that exceed this amount.
The inheritance tax nil-rate band can be increased dependent on circumstances. For example, if you leave an estate to a direct descendant when you pass away, an additional ‘residence nil-rate band’ can be added.
The maximum residence nil-rate band is set to £175,000 up until 2030. This amount is added onto the existing £325,000 allowance – Therefore, the total value of the estate would be worth up to £500,000 before any inheritance tax is payable.
It’s important to consider that if you co-own your estate, only the value of the share that you own will be counted.
[H2] How much is inheritance tax (IHT)?
If the value of the estate inherited is above the £325,000 inheritance tax threshold amount, the remaining value of the estate could be liable for tax at the rate of 40%.
For example, if the estate that has been inherited is worth £500,000 and the current inheritance tax threshold is set at £325,000, the tax charged would be on the remaining £175,000.
The inheritance tax for the estate would be £70,000 (40% of £175,000).
Below are more examples of how inheritance tax is calculated and how much may be owed:
| Total value of estate | If the IHT nil-rate band of £175,000 is claimed | IHT payable if residence nil-rate band is not claimed |
| £325,000 | None | None |
| £400,000 | None | £30,000 |
| £500,000 | None | £70,000 |
| £600,000 | £40,000 | £110,000 |
| £700,000 | £80,000 | £150,000 |
| £800,000 | £120,000 | £190,000 |
| £1,000,000 | £200,000 | £270,000 |
[H2] Do I pay inheritance tax if I inherit a business?
In a small business, preserving both the business and livelihood can be challenging. Typically, inheritance tax is due to be paid for those who are inheriting a business. But there are business property reliefs and exemptions in place. These include life insurance policies, gifting and succession planning, and business property relief (BPR). Each of these tax relief options can all help small businesses help plan more effectively for future tax obligations. Read more below to find out more about the available options for inheritance tax planning.
[H2] Is inheritance tax payable for married couples who own a small business?
There are benefits for inheritance tax for couples who are in a civil partnership or married. This includes if you choose to pass all your assets to your husband, wife, or civil partner, there will be no inheritance tax to pay.
This means that your nil-rate band in place will not be used, which entitles your partner to double their nil-rate band and prepare before their passing.
[H2] Is there inheritance tax relief for small businesses?
Inheritance tax relief is available for certain types or property, including farms and other business assets.
[H3] Business relief
Business relief is a government-backed scheme that allows you to reduce or avoid paying inheritance tax on investments that qualify. A business relief can be claimed to reduce the value of a business or its assets for inheritance tax purposes.
[H3] Agricultural relief
Agricultural relief can be claimed on agricultural property while this is transferred to the beneficiaries to reduce the amount of inheritance tax to be paid.
[H2] What sort of inheritance tax planning should I consider?
Thorough inheritance tax planning can help small businesses take advantage of available tax benefits. Some of these planning processes include:
[H3] 1. Consider Business property relief
For small businesses, BPR can be an effective way to reduce inheritance tax. But to use business property relief effectively, the business must primarily engage in trading activities, instead of investments, and the assets of the business are to be held by the deceased for no longer than two years before their passing.
Careful consideration and planning are hugely beneficial for small businesses utilising BPR and is a way that can help businesses reduce inheritance tax requirements.
[H3] 2. Gifting and succession planning
By choosing to gift parts of the business while the owner is still alive can exempt these transfers from inheritance tax when they are gifted more than seven years before the owners passing.
This process requires careful inheritance tax planning with the help a professional accountant to navigate regulations and tax advantages. This is one of the many accounting services we offer at Accountancy Solutions. Our experts are ready to plan the future of your small business – talk to us to get started!
[H3] 3. Life insurance policies
For a small business, setting up policies within a trust allows payouts to go directly to the beneficiaries. Choosing to plan for inheritance tax ensures that any financial plans are in place to secure the businesses future and support the beneficiaries of the business. This could lessen inheritance tax and increase their payout.
Our experts at Accountancy Solutions can walk you through inheritance tax and planning. Simply contact us to find out more.
We hope this guide answering, ‘Inheritance tax for small businesses’ was helpful. Next, see our guide on capital gains tax for businesses for further accounting insights for a successful company.