Why business owners should think twice before disposing of assets

When looking to the future, or going through a change in circumstances, it’s likely that business owners will wonder whether selling or disposing of assets and interests is the right step to take.

Many are aware that some or all of their business assets might qualify for Business Property Relief (BPR), which reduces their estate’s overall liability for inheritance tax when they die.

However, if appropriate advice isn’t taken when approaching retirement, or perhaps when downsizing a business premises in the wake of the pandemic, it can often be overlooked that the sale or disposal of business assets can restrict the availability of BPR.

What does BPR offer?

Depending on the nature of the assets and the purpose of the business, BPR can offer either 100% or 50% relief on business assets or interests. Those that qualify must have been owned by an individual for at least two years before they die, and crucially, they must still be within that individual’s estate at the time of their death.

What happens when you sell or dispose of assets or interests?

Disposing or selling qualifying business assets and interests puts the availability of BPR at significant risk. Doing this often means business owners hold large cash sums instead, which subsequently don’t qualify for BPR, and this therefore increases the inheritance tax liability of their estates.

It’s important to remember that if appropriate legal and financial advice is undertaken in advance, steps can often be taken to ensure that the disposal or sale of business assets occurs in the most tax efficient manner. Not only is it possible to consider the tax position at the time of sale, but also to plan tax for the future, as there are options available to preserve the availability of BPR allowance.

What else do I need to consider?

Another matter, which is often overlooked, is updating a will to reflect a change in circumstances, as well as considering how to preserve inheritance tax reliefs such as BPR for generations to come.

For example, a business owner may choose to leave everything to their spouse, which would already qualify for 100% inheritance tax relief due to spousal exemption. However, a spouse may then choose to sell the business assets and investments after their spouse’s death, thus increasing the value of their own estate, which is chargeable to inheritance tax, when it may have been more tax efficient to pass these assets or interests on to children or grandchildren.

If you’re looking ahead and considering selling or disposing of business assets; or if you would like to make or update a will, our corporate and wills, trusts & probate teams would be happy to help.

Our Legal 500-rated wills, trusts & probate team has the expertise to help you plan for the future and guide you through any difficult challenges that may arise, including those relating to business property relief.