In an era of potential legislative changes and economic uncertainty, protecting your family business or agricultural assets has never been more crucial. Recent reports suggesting that the new government might consider removing certain inheritance tax reliefs have sent ripples of concern through the business community. However, there’s a powerful tool at your disposal that can help secure your legacy: trusts.

The Looming Tax Landscape

The Telegraph recently reported that scrapping inheritance tax relief could potentially hit family businesses with a staggering £1.4 billion annual bill. This proposed change would affect over 3,000 family businesses each year, potentially triggering company liquidations and job losses.

Currently, business owners can claim up to 100% relief on passing on business assets, such as shares in an unlisted company. This relief is a lifeline for many family-owned enterprises, which make up 90% of all privately owned firms in the UK, employing around 14 million people.

The Power of Trusts

While the future of tax legislation remains uncertain, there’s a proactive step you can take now to protect your assets: setting up a trust. Trusts, particularly discretionary will trusts, offer a robust method of safeguarding your business or agricultural assets from potential changes in inheritance tax laws.

How Trusts Work

A discretionary will trust is an arrangement where trustees are appointed with the discretion to decide who, from a specified class of beneficiaries, should benefit and when. This structure offers several advantages:

1. Preservation of Reliefs: Even if tax laws change in the future, assets placed in a trust now may be protected under the rules that were in place when the trust was established.
2. Flexibility: Trustees can adapt to changing circumstances, ensuring that your assets are managed in the most tax-efficient way possible.
3. Protection Against Sale: If business assets are left directly to a spouse who later sells them, valuable reliefs could be lost. A trust can prevent this scenario.

Case Study: Preserving Business Property Relief

Consider the case of Mary and Jack, who owned a successful furniture business worth £2 million. 

Scenario 1 (Without Trust):
Mary left her £1 million share directly to Jack. When Jake sold the business and later passed away, their children faced a hefty inheritance tax bill of £600,000 on the now-invested proceeds.

Scenario 2 (With Trust):
Mary left her shares to a discretionary will trust. When Jack sold the business, the trust’s assets remained protected. Upon Jack’s death, the trust’s beneficiaries received the assets with significantly reduced tax liability.

Why Act Now?

While it’s true that any changes to inheritance tax laws are unlikely to be retrospective, there’s no guarantee of this. By setting up a trust now, you’re taking a proactive step to protect your assets under current legislation.

Moreover, trusts offer benefits beyond tax planning:

1. Asset Protection: Trusts can shield your assets from creditors or in the event of divorce.
2. Succession Planning: They provide a structured way to pass on your business to the next generation.
3. Privacy: Unlike wills, which become public documents after death, trusts offer confidentiality.

Considerations and Caveats

While trusts offer significant benefits, they’re not without complexities:

1. Ongoing Management: Trusts require active management and may incur administrative costs.
2. Potential Tax Charges: Trusts may be subject to their own tax regime, including periodic and exit charges.
3. Legal Complexity: Setting up and managing a trust requires expert legal and financial advice.

Conclusion: A Stitch in Time

The potential changes to inheritance tax reliefs serve as a stark reminder of the importance of proactive estate planning. While we can’t predict the future, we can prepare for it. By considering a trust structure now, you’re not just potentially saving on future tax bills; you’re securing a legacy for generations to come.

Remember, the key is to act before any legislative changes occur. As the old adage goes, “A stitch in time saves nine.” In this case, a trust established today could save your family business or agricultural assets tomorrow.

Every family business and agricultural enterprise has unique needs and circumstances. To explore how trusts can specifically benefit your situation and to ensure your legacy is protected, don’t hesitate to contact me on 07831 379562 or email [email protected]. 

As your Inheritance Guru, I’m here to guide you through the complexities of estate planning and help you secure your family’s future.