‘Tax doesn’t have to be taxing’ ran the HMRC’s old ad campaign, encouraging us to fill in our tax return on time. But when it comes to taxes that are due on the death of business owners, the statement simply does not hold true – they’re complex, convoluted and, when incorrectly managed, horrendously expensive. It’s therefore absolutely essential to get skilled and professional advice. That said, in this third blog we’ll look at tax basics for HR consultants, as a rudimentary knowledge of inheritance taxation is essential when advising owners.
Not many people realise that the starting point for administering the decease’s affairs is a tax return. Until the tax is paid, the court will not give the go ahead (the grant of probate) for the executor to begin the process of paying creditors, charges, expenses and finally, legacies.
Although the business owner may be deceased, there is still an obligation to pay income tax. Firstly, tax is due on any income earned prior to death (although the owner’s estate will benefit from the full annual allowance, irrespective of the date of death). Normal tax planning, carried out during the owner’s lifetime, is the only effective strategy to reduce tax owed. Secondly, income may not stop just because the business owner has died. For example, a ‘buy to let’ landlord‘s property will continue to generate revenue after they die, until the end of the tenancy. Executors will be liable to pay any income tax due at the time of the owner’s death and on any continuing income, both of which will be taken from the estate.
Inheritance tax, currently charged at a maximum of 40% in the UK, tends to be the main focus of business owners’ anxieties. After their inheritance tax allowance (the nil rate band) is taken into account, all of an owner’s assets are lumped together, including their business interests, for tax calculation. But a great deal can be done to reduce the inheritance tax liability of these assets.
As an example, trading companies (e.g. engineering) attract 100% inheritance tax relief, whereas investment companies (e.g. commercial property) attract 0% relief. Consider an engineering business that also has some commercially rented property. If the majority of the profit, time and turnover is attributed to property rental, it may be advisable to split the business into two. As the company’s activities will be assessed for inheritance tax ‘in the round’ (in this case predominantly investment) the company can only attract inheritance tax relief with structural change.
Capital Gains Tax
Capital gains tax (CGT) is not primarily concerned with the death of the business owner. Assets are passed from that individual to the beneficiary without any CGT to be paid. However, when the beneficiary finally comes to sell their inherited asset, CGT will be charged at 18% or 28%. As in the case of inheritance tax, a lot can be done in terms of prior planning to reduce the impact of the tax, especially considering differing individual tax rates and reliefs.
For example, business assets that are to be sold after the owner’s death will attract CGT if the assets have increased in value. Executors and beneficiaries both have the power to sell assets, although they may be subject to different CGT rates, different allowances and attract different reliefs. So a conscious choice can be made regarding who will sell the assets and when, to reduce the CGT bill.
So taxes, like dying, are inevitable. However, with careful planning, their impact can be greatly reduced.
[Note: the content of this blog applies to England and Wales only, as other jurisdictions have different laws and legal processes. In addition, this blog is not a substitute for personalised guidance from a professional adviser and is for information only.]