Business owners need special Wills
Nobody plans to die before retiring.
But if you do and your current Will leaves everything to your spouse, then your children could have an unnecessary tax to pay after your spouse dies.
Read the real life case study below.
Wills for business owners need to have specific clauses and the right sort of trusts in them to avoid your children paying Inheritance Tax on the value of your business after your spouse has also passed away.
Case Study We saved the children from having to pay £400,000 Inheritance Tax (IHT)!
Mr & Mrs T are married and have joint personal assets in excess of £1m. They have three children who are all over 21 and financially independent.
Mr T has business assets valued at £1m. Mrs T is not involved with the business. They have standard mirror Wills leaving everything to each other and then to the children on second death.
We explained what would happen if Mr T died before he retired which is as follows.
All his assets will pass to Mrs T under the terms of the Will. There is no Inheritance Tax between spouses or civil partners. Mrs T has enough money to live comfortably from the joint personal assets that she has inherited but, she has also inherited Mr Ts shares in the business.
Under the terms of the shareholder agreement, Mrs T has to sell these to the company. She does this and receives a further £1m. As she does not need this money, she puts in on deposit with various banks and building societies. In due course Mrs T passes away and the children inherit everything. For simplicity we need to ignore the tax due on the previously owned joint assets which were already above the Nil Rate Band and so some IHT is payable anyway. The £1m which came from the business is fully taxable at 40%. i.e. £400,000. This could have been avoided.
If Mr T sets up a Will that has a ‘business trust’, the shares can pass to the trust on his death free of IHT under rules relating to Business Property Relief. Mrs T and the children, as trustees of the trust, still have to sell the shares to the company so the trust ends up with assets of £1m. This money can still be invested in the same way as Mrs T would have done had she inherited directly. The beneficiaries of the trust are Mrs T and then the children. Mrs T can still access the money if she needs it.
The key point here is that when Mrs T dies, the money in the trust is not part of her estate so there is no IHT to pay. A saving of £400,000.