For business owners, ensuring the seamless transfer of wealth and ownership to the next generation is a vital part of long-term planning. Inheritance tax planning and Section 72 life assurance policies play a crucial role in safeguarding a business from potential financial strain due to tax liabilities. Without proper planning, inheritance tax can create significant challenges, potentially leading to the sale or fragmentation of a business.
Understanding Inheritance Tax and Its Impact on Businesses
Inheritance tax is levied on the value of a deceased person’s estate, including business assets, above a certain threshold. This can lead to a significant bill for any beneficiaries, possibly forcing them to liquidate assets to pay the tax bill.
For business owners, this can be particularly concerning. If beneficiaries lack the funds to cover the liability, they may be compelled to sell shares, property, or even the entire business. This disruption can impact employees, clients, and overall business continuity.
Proper inheritance planning is, therefore, essential to ensure that assets are passed on efficiently without compromising the business’s viability.
The Importance of Inheritance Planning in Business Protection
Strategic inheritance tax planning helps mitigate the financial risks associated with it. Some key approaches include:
- Use Business Property Relief (BPR): If eligible, BPR can provide considerable relief on certain business assets, ensuring that they are transferred with minimal tax liability.
- Consider Gifting Strategies: Transferring business shares or assets as gifts during one’s lifetime can reduce the taxable estate’s value. However, these gifts may be subject to the seven-year rule, meaning they must be given well in advance of death to avoid taxation.
- Set Up Trust Structures: Business owners can place assets in a trust to remove them from the estate, providing tax-efficient succession planning.
- Use Section 72 Life Assurance Policies: This is a specialised insurance policy designed to cover inheritance tax liabilities, ensuring that heirs have the necessary funds to meet tax obligations without disrupting the business.
Using Section 72 Life Assurance Policies
A Section 72 life assurance policy is an effective tool for managing inheritance tax liabilities. It is a specially designed insurance plan, structured to pay out a lump sum that covers the tax bill upon the policyholder’s death. This ensures that the heirs receive the business and other assets intact without the need for forced sales.
How Section 72 Plans Work
The policy is taken out by the business owner and written under a trust to ensure that proceeds are paid directly to beneficiaries. The sum assured is calculated based on estimated tax liabilities, ensuring adequate coverage. Premiums are typically paid on an ongoing basis, and because the policy is structured for tax purposes, the payout is exempt from tax.
By integrating a Section 72 plan into a business protection strategy, business owners can provide their heirs with financial security, ensuring that their legacy remains intact.
Next Steps
Inheritance tax planning and Section 72 plans play a pivotal role in business protection, ensuring that business owners can pass on their enterprises without the burden of excessive taxation. A comprehensive approach that incorporates business protection alongside effective inheritance tax planning will ensure business continuity, management of tax liability and smooth transition of ownership.
To consider the options that are right for you and your business and align with your goals, just book a free, no-obligation chat with our experts where we find out a bit more about you, explain our services, and how we could work together, or complete the form below and a member of our team will call you back.
