As part of tax planning many of our clients have introduced trusts to their business structures over time. Whether a business trades as a partnership or a limited company trusts have for many years been, and continue to be, an effective Inheritance Tax planning tool.
With the Government’s recent announcements on the proposed changes to Inheritance Tax rules, it is a good time for all individuals to review their Inheritance Tax plans and to make sure that the steps they have taken in the past are still appropriate. Even more so where trusts are present.
The recent Budget proposed that Business Property Relief / Agricultural Property Relief would be limited to a 50% relief for assets in excess of £1,000,000. Under such a regime trusts could start paying tax on business and agricultural assets held by them.
Although this area is subject to a technical HMRC consultation and no draft legislation has been published yet, it is expected that that tax charge would be at an effective rate of 3% every ten years on business and agricultural assets in excess of the trust’s available 100% Relief allowance and any nil rate band allowance (up to £325,000 per settlor) available. For trusts established before 30 October 2024 each trust will retain a £1Million 100% Relief allowance (subject to that trust having qualifying agricultural or business property at 29 October 2024), whereas for trusts established after 30 October 2024 the £1Million 100% Relief allowance will be apportioned across all trusts established by the same settlor. What this means is that for the first time in the life of the trust, many trusts could soon start paying tax charges on each ten year anniversary.
The benefits of a trust in terms of retaining control of assets, and the Inheritance Tax planning benefits, still exist. Whilst a trust may pay a ten year charge at an effective rate of 3%, that is considerably less than the effective rate of 20% tax that would be paid if those business or agricultural assets were held by an individual on death. In addition, if trusts have been set up before 30 October 2024 the benefit of multiple 100% relief allowances is clear.
However, these things should always be kept under review. If the need for control over the assets has decreased as time has moved on, it may be an appropriate time to consider transferring some, or all, of the assets within a trust to an individual beneficiary, or multiple individual beneficiaries. Those individuals will not pay inheritance tax during their lifetime and so this would postpone a tax charge when compared to an upcoming ten year charge. Alternatively, it may be the time to consider different ownership structures. By changing the structure of your business you could cap the assets within the trust at a certain level mitigating any ten year tax charge payable by it and allowing growth to be held outside of the trust. You could also use minority discounts and more complex share structures to reduce the amount of value held by each shareholder, although this is a complex area and the HMRC consultation suggests the rules around valuation of fragmented company holdings may be tightened up.
It is important to avoid knee jerk reactions and there will be no “one size fits all”. It will be important to understand all of the circumstances and to make sure that sensible commercial decisions are taken. It may be that doing nothing is the best course of action, but clients should use the opportunity to take stock and assess.
If you would like to discuss any of the above we can help. Please contact Lizzie Walters.