The Business Trust – A Guide

The Business Trust arrangement allows full advantage of 100% Business Property Relief (BPR) to be taken. It can also be used where assets qualify for 100% Agricultural Property Relief (APR)

BPR and APR are extremely valuable relief’s for Inheritance Tax (IHT) purposes in that most cases the shares or interest in a business will qualify for 100% relief from IHT without any upper limit. This means that businesses can be left to future generations without any IHT liability arising.

Unfortunately in many cases these generous gifts can be wasted since on first death the shares or interest in the business is frequently left to a surviving spouse. Whilst this may not cause a problem where the spouse intends to retain an interest, where the intention is to sell, an IHT liability can arise on the death of the spouse. The Trust is therefore particularly useful if a there is a business protection arrangement in place whereby the remaining shareholders or partners are likely to buy the shares or interest.

Take the following example:

Andy, Bob & Charlie are all equal shareholders in an unquoted company worth £750,000. To provide a smooth buyout for the company’s shares they have each taken out life assurance policies for £250,000 on their own lives and placed each policy under a Flexible Business Trust for their co-shareholders.

They have then entered into Cross Option Agreements which state that the surviving shareholders have the option to purchase the shares in the business from the personal representatives if one of the shareholders dies. Similarly the personal representatives have the option to sell the shares to the other shareholders. As the business is a trading company and the shares have been held for at least two years, it is anticipated that 100% BPR will apply. All the shareholders are married with children and their Wills currently leave all their assets to their surviving spouses.

1. Andy dies first and the proceeds from his policy pay out to Bob & Charlie.

2. Bob & Charlie use these proceeds to buy the shares from Andy’s estate.

3. Andy’s personal representatives then pass the cash received to his widow, Denise.

4. No IHT applies due to the spousal exemption.

5. However, when Denise dies, the proceeds from the sale of the shares are part of her estate.

6. IHT liability on second death therefore is £250,000 x 40% i.e. £100,000, assuming the nil rate band has been used by other assets.

How can the Business Trust help?

Andy could have established a Business Trust in his Will and nominated that the shares in the business should be held in trust for his wife/children. The IHT liability on second death will be as follows;

1. Andy dies first, the shares he owns pass into a Business Trust for his beneficiaries and the proceeds from his policy pay out to Bob & Charlie as before.

2. Bob & Charlie use the proceeds to buy the shares from Andy’s beneficiaries Business Trust .

3. The personal representatives then pass the cash received to the trustees of the Business Trust to hold on Trust for the children of the named beneficiaries.

4. No IHT applies on the transfer to the Trust due to the availability of 100% BPR at the time of Andy’s death.

5. The Trustees can use their discretion to pay or lend funds to Denise, Andy’s widow.

6. Since the value of the Trust fund will not be treated as part of the Denise’s estate, then on her death, the IHT liability on the proceeds from the sale of the shares is nil. Any loans made to her from the Trust will reduce the value of her own estate.

What is the IHT position on Andy’s death?

Assuming that under the Business Trust Andy’s children are entitled to income from the Trust fund (and therefore have the interest in possession) on Andy’s death, the transfer will be treated as having been made from Andy to his children. Although this potentially incurs IHT, no charge arises where full 100% Business Property Relief is available.

How are Trust assets used for the benefit of Andy’s widow?

Subsequently, as and when Denise requires cash from the Trust, the Trustees, and Denise can be a Trustee, can make irrevocable appointments of capital to herself and pay the necessary cash.

Alternatively, it may be more IHT efficient for the Trustees to make loans to Denise. These can be interest free if interest is charged on the loan it will be Trust income payable to Andy’s children and liable to income tax at personal rates.

For more information or to discuss your needs, please call John Ireland now

on 0208 547 2583 or email,

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