Why Use A Business Trust?
It’s common to want to leave a business as a legacy to a spouse. On death, this transfer would be free of inheritance tax (IHT), due to spouse’s exemption.
If the business qualifies for business property relief, it may also pass IHT free on the second death.
What if:
- the surviving spouse doesn’t want to run the business;
- a business partner wants to buy the deceased’s shares from the spouse;
- they decide to run the business for a while but eventually sell it in their old age to retire?
The business asset which is exempt from Inheritance Tax is replaced by one that will be subject to Inheritance Tax (cash). This is because Business Property Relief can no longer be applied.
The solution is a trust, which takes all the assets which qualify for Business Property Relief. Then if the business is sold between the first and second death, the surviving spouse’s estate is unaffected as the trust owns the proceeds rather than the spouse.
A letter of wishes is usually drafted saying the spouse is to be treated as the main beneficiary of the trust. Then on their death, the letter of wishes could direct that the trust is:
- wound up with assets distributed to the beneficiaries; or
- it could continue to run, protecting assets for any of the beneficiaries.
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