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If you own a family business, have you ever considered putting it into trust?

There are many reasons why doing this could be a distinct advantage.  Here are just some:

  • you will have much more control what happens to that part of your wealth after you have passed on
  • you can ensure it remains in your “bloodline”
  • a trust can protect valuable assets from future creditors, the local authority pressing for care charges, and even ex-spouses wanting to increase their share in a divorce settlement
  • you can reduce the potential Inheritance Tax your children or grandchildren may ultimately have to pay.

You may be surprised that I have referred to Inheritance Tax in the same breath as a family business.  Surely your family business will not be subject to Inheritance Tax anyway if it is a trading company?

Broadly speaking, that is true as long as the asset you own is a trading company.  But what happens if at some time in the future you decided to sell it?  You will now have the value of the company, but not the company itself, and that value will be subject to Inheritance Tax.  Many family business owners miss this point entirely, to the cost of their children, grandchildren or other beneficiaries.

It is possible to avoid this potential problem, as well as gain the many other benefits of holding your wealth in trust, by setting up a series of trusts on different days and placing part of the value of your business in each trust.  I would suggest putting no more than £200,000 of value into each trust so there is plenty of headroom for growth before the “nil rate band” of £325,000 is reached.  The reason you do not want to exceed a value of £325,000 in each of your trusts is quite complex but, put simply, if you keep below this value there will be no ongoing Inheritance Tax for the trust to pay.

You may have heard that in 2015 HM Revenue & Customs curbed the ability to set up a series of trusts and avoid lifetime Inheritance Tax, unless you wait a whole 7 years between each trust being settled.  But don’t worry!  This will not apply to you if you are putting the value of your trading company into trust.  If the company is worth £1,000,000 you can get it all into a series of £200,000 trusts in just 5 days.  If it is worth £10,000,000 it will take you a little longer, but still less than 2 months.  There is no real limit on the value of a business you can transfer out of your estate in this way.

If you are planning to sell your company and then leave some or all of the value to your children or grandchildren, this could be a great way to do so without 40% of that value disappearing in Inheritance Tax.

A strategy like this is not the right strategy for everyone who owns a family business.  You may not want to lose your ownership of even a small part of the company (although bear in mind you can be one of the trustees and therefore still maintain control).  There may also be Capital Gains Tax implications, although there are various legitimate ways of dealing with this and minimizing or even eliminating this tax entirely.  But you should at least discuss the strategy with your professional advisers to see if it is something worth considering.

We specialize in advising clients (especially business owners) on trust planning of this kind, and would be happy to discuss the benefits with you further.  Contact us on 023 8089 2111.