Business Assets and Trusts
If you have a business asset, for example shares in a privately owned business or you own agricultural land, you could qualify for valuable tax relief on the sale of these assets if they qualify for either Business Property Relief (BPR) or Agricultural Property Relief (APR). In both cases the provisions and reliefs available are generous.
However on its own these reliefs provide limited long term bloodline protection and, also, limited long term tax advantages.
To enhance the protection on such assets there are very powerful reasons to put a trust arrangement in place.
The ‘problem’ with either BPR or APR is that it represents an attractive tax break on the sale of the assets, but it is a moment in time relief.
For example, if you own qualifying shares in a private company and these are sold, you will be able to claim BPR and dramatically reduce the tax liability on the resulting pay-out.
However the pay-out, in cash, then enters your estate – and can then be subject to future taxes and possible third party claims (see below).
Also if you die whilst holding the qualifying asset, for example the shares you own in a business, these may then pass to your beneficiaries (for example, your spouse or children). If they are minded to sell the asset shortly thereafter, they will not be able to claim the BPR (or APR) on the proceeds of sale in future years.
The generosity and value of relief is easily lost in the wrong circumstances.
A trust solution can help maintain the tax benefits especially after death.
More pertinently the trust solution can present a much wider benefit: long term tax savings and protection for you and your family.
Using the example of shares in a private business, these can often present a very significant pay-out to the owner at some point.
If this pay-out is arranged so the value (or part of the value) enters a trust, either pre or post sale, the asset or its cash value is then held in the trust and can be disbursed out of the trust according to your wishes.
This disbursement can be controlled by the trustees in such a way that the value is provided to your chosen beneficiaries in a manner which means it is not in their Estate (for example by a loan out of the trust to them).
The benefits and the protection afforded to your family of using a trust in this way can be substantial:
- The trust can provide protection against the value of the asset(s) being decimated at a later date through one or more of your beneficiaries going through a divorce, becoming bankrupt or dying;
- The trust can protect against ‘third party’ claims and is useful in supporting a surviving spouse who may go into care;
- The use of Business Trusts on death are essential for maximising the availability of the new Residential Nil Rate Band tax allowance and can benefit many business owners;
- Likewise the trust can keep the value from becoming part of an IHT assessment should they pass to your spouse on your death;
- If your beneficiaries’ estates are liable to be subjected to IHT in the future, by paying the value through the trust to them their estate is unaffected. This could represent a saving of £40,000 for every £100,000 for their own children.
The primary benefit of any trust is to ensure family and bloodline protection, at the same time as ensuring your wealth is directed exactly where you want it to go, even long after your death. This is particularly important in situations which involve future re-marriages.
Furthermore, for larger estates, trusts can be used to create additional tax planning opportunities and by extension, significant tax savings.
The trust solutions described above are likely to involve a framework of one or more different trust types, so that the business assets and the wider family assets are co-ordinated through a complete package.
This package may include putting in place cross option agreements to protect shareholders in a company where the shareholders want the shares, on the death of one of them, to end up with the surviving shareholders.
In these cases the trust arrangement is crucial to ensure maximum tax efficiency.
If you establish a business trust framework now to receive your business or agricultural assets on sale or on death you can potentially protect against all of the threats described. And you can do this without upsetting the Business Property Relief or Agricultural Property Relief.
Putting such a trust in place is relatively straightforward and any arrangement will retain maximum flexibility for you to change your plans throughout.