Dealing with business assets in a Will

What are considered business assets?

Business assets encompass a broad range of property and interests connected to your commercial activities. These include shares in companies (whether quoted or unquoted), partnership interests, sole trader business assets such as goodwill, stock, equipment, and premises, intellectual property rights including patents and trademarks, business debts owed to you, and any loans you’ve made to the business. The key distinction is whether these assets are used wholly or mainly for business purposes, as this affects their treatment for inheritance tax purposes.

Can you leave assets to a company in your Will? How does this work? What’s the process?

Yes, you can leave assets to a company in your Will. The process involves naming the company as a beneficiary with its full legal name and company registration number. The company’s articles of association must permit it to receive such gifts. Upon your death, the executors will transfer the assets to the company, which may involve share transfers, property conveyances, or simple asset delivery depending on the nature of the assets. The company will need to provide appropriate documentation to the executors, and there may be tax implications for the company receiving the assets, particularly if they constitute a distribution for corporation tax purposes.

What happens to business assets when the owner dies?

The fate of business assets depends entirely on your Will and the business structure. If you’re a sole trader, the business effectively ceases, and assets pass according to your Will or intestacy rules. For partnerships, the partnership agreement typically governs what happens – often providing for automatic dissolution or buyout provisions. If there is no partnership agreement, then the partnership should be dissolved and the assets valued, and then split 50:50. There is no automatic right for the survivor in a business partnership to buy the other share or simply take over.

Company shares pass like any other asset under your Will unless there is a clear share ownership agreement in place dictating what happens in these circumstances.
If there is a shareownership agreement, this takes effect before the Will and can help with business continuity, as well as potentially keeping assets out of your estate for inheritance tax purposes.

Without proper planning, business assets may need to be sold quickly to pay inheritance tax bills, potentially at below market value. This is why succession planning is crucial – you need clear instructions about whether the business should continue, be sold, or be wound up.

Do I need an LPA as a business owner?

A Lasting Power of Attorney is particularly important for business owners. You should consider both Property and Financial Affairs LPA and Health and Welfare LPA. The Property and Financial Affairs LPA can include specific provisions for business decisions, allowing your attorneys to manage business operations, make commercial decisions, and handle business banking if you lose capacity. However, be aware that some business arrangements (like partnership agreements) may have specific provisions about what happens if a partner loses capacity, and your LPA should complement, not conflict with, these arrangements.

How much are inheritance tax rates?

I believe you’re asking about inheritance tax rates on business assets. The standard inheritance tax rate is 40% on estates exceeding the nil-rate band (currently £325,000, plus £175,000 residence nil-rate band where applicable). However, qualifying business assets may benefit from Business Property Relief, reducing the taxable value by either 50% or 100% depending on the type of asset.

You can get 100% Business Relief on:

• a business or interest in a business
• shares in an unlisted company

You can get 50% Business Relief on:

• shares controlling more than 50% of the voting rights in a listed company
• land, buildings, or machinery owned by the deceased and used in a business they were a partner or controlled
• land, buildings, or machinery used in the business and held in a trust that it has the right to benefit from

You can only get relief if the deceased owned the business or asset for at least 2 years before they died.

This relief can significantly reduce or eliminate inheritance tax liability on business interests, making proper structuring essential for substantial business estates.

What is the 2-year rule for business relief?

Business Property Relief requires that you’ve owned qualifying business assets for at least two years immediately before your death. This ownership period ensures the relief isn’t available for assets acquired purely for tax avoidance purposes. The two-year rule applies to each asset individually, so if you’ve owned some business assets for longer and others for shorter periods, relief applies only to those held for the full two years. There are some exceptions for replacement assets, where the combined ownership period of the old and new assets can count toward the two-year requirement.

How can a business avoid inheritance tax? Which assets qualify for 100% business relief?

Several strategies can help minimize inheritance tax on business assets. Assets qualifying for 100% Business Property Relief include unquoted company shares (including AIM shares), business or partnership interests, and assets used in a business controlled by you or your family. Assets used in a partnership or company you control may qualify for 50% relief. The business must be primarily trading (not investment) to qualify. Additional strategies include making lifetime gifts of business assets (potentially qualifying for both Business Property Relief and annual exemptions), establishing Employee Ownership Trusts, or restructuring to maximize qualifying assets.

Will business relief for IHT apply to a business if there is a buy and sell agreement in place?

Buy and sell agreements don’t automatically disqualify Business Property Relief, but they can complicate matters. The key issue is whether the agreement creates a binding contract for sale, which might mean you don’t have full ownership at death. HMRC examines these arrangements carefully. Options or rights of first refusal are generally acceptable, but binding obligations to sell may jeopardize relief. The agreement’s terms, whether it’s triggered by death specifically, and whether it reflects full market value, all affect the relief’s availability. Professional advice is essential when drafting such agreements to preserve tax benefits.

Anything else to add?

Several additional considerations are crucial for business owners. Regular valuation of business interests helps with estate planning and insurance needs. Consider whether business assets should pass to family members capable of running the business or whether the sale and distribution of proceeds is preferable. Key person insurance can provide funds to pay inheritance tax without forcing asset sales. Shareholder agreements should address death scenarios comprehensively. Don’t forget about business debts and guarantees you’ve given, which remain liabilities of your estate. Finally, consider the timing of business disposal – lifetime sales or gifts may be more tax-efficient than death transfers, particularly with proper use of entrepreneurs’ relief and annual exemptions.
Someone can give away business property or assets while they’re still alive, and the estate can still get Business Relief on Inheritance Tax, as long as the property or assets qualify.
If someone gives away business property or assets while they are alive, the recipient must keep them as a going concern until the death of the donor if they want to keep the relief.
They can:

• Replace the property or assets – like machinery – with something of equal value if it’s for use in the business
• And only get relief if the donor owned the business or asset for at least 2 years before the date it was given

A little more complex, but this could help with estate planning, and as you know, a regular review of your Will and business arrangements is essential, as changes in business structure, tax law, or family circumstances can significantly affect your estate planning effectiveness.