The Legacy Guide to Business Trusts: Safeguarding Your Assets for Future Generations

At The Legacy Wills Company, we understand the importance of effective estate planning to ensure that your hard-earned assets seamlessly transfer to future generations without undue tax burdens.

One of the most effective tools in achieving this goal is through establishing a Business Trust.

Understanding Business Relief (BR) and Agricultural Relief (AR)

Both Business Relief (BR) and Agricultural Relief (AR) offer substantial benefits for inheritance tax (IHT) purposes. Essentially, shares or interests in qualifying businesses or agricultural properties are potentially exempt from IHT, even without an upper limit. This exemption allows assets to be passed on to future generations without incurring IHT liabilities, provided certain conditions are met.

The Pitfall of Direct Inheritance

However, direct inheritance to a surviving spouse, while initially exempt from IHT under spousal exemptions, can create substantial tax liabilities later if the surviving spouse decides to sell the asset. If the spouse passes away post-sale, the cash proceeds from the sale then form part of their estate, possibly resulting in significant IHT liabilities.

Example Scenario: The Impact of a Business Trust

Consider the case of Andy, Bob, and Charlie, who co-own an unquoted company valued at £750,000. Each has a life insurance policy of £250,000 placed in a Flexible Business Trust for the benefit of co-shareholders, underpinned by Cross Option Agreements for buying out shares upon death.

Upon Andy’s untimely death, his shares would typically pass to his widow, Denise, risking IHT on her eventual death. Instead, if Andy had established a Business Trust in his will, his shares would pass into the trust, preserving the availability of 100% Business Relief.

How Does a Business Trust Work?

  1. At Andy’s Death: His shares pass into the Business Trust, specifically designated for his beneficiaries. Bob and Charlie use the life insurance payout to buy the shares from the trust, just as they would from his estate.
  2. The Business Trust’s Role: The trust receives the cash from the share buyout, which the trustees can then manage to benefit Andy’s widow and children. No IHT is applicable on the transfer to the trust due to the intact 100% Business Relief.
  3. Managing Funds for the Beneficiary: The trustees can either disburse funds directly to Denise or offer her loans from the trust assets, which would not form part of her personal estate, thus avoiding further IHT liabilities upon her death.

Strategic Advantage of Business Trusts

The use of a Business Trust not only mitigates immediate IHT liabilities but also offers flexibility in managing the financial needs of the beneficiaries. It ensures that the business continues with minimal disruption while protecting the financial interests of the deceased’s family.

Conclusion

Setting up a Business Trust is a nuanced process that requires careful consideration and professional guidance. At The Legacy Wills Company, our team of estate planning experts and independent financial advisors is here to provide you with the necessary expertise to protect your assets and ensure your legacy thrives through generations.

For a personalised consultation, please contact John Ireland at 0208 547 2583 or send your inquiries to enquiries@legacy-wills.co.uk.

 

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“Having seen John of Legacy Wills present at a property event, it was clear he had both the breadth of knowledge and experience and also the ability to make a very dry subject both understandable and engaging. That’s a tough call when talking about Wills, Trusts and death. John produced Wills and POA’s for myself and my wife in a timely, effective and reasonable manner. I have subsequently recommended him to numerous colleagues and friends to cut out the jargon and challenges surrounding this critical protection, which is too often deferred or neglected.”

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