Business Relief – the missing and costly link

31 May 2022

There’s a key point missing from the advice most IFAs are giving on business relief – and it could be costly, says Ben Mason, CEO of Kinherit.

We all know business relief can be a powerful tool when it comes to IHT planning, and with more people now being taxed on death, the potential to grow this side of your business is huge. But what if the advice you’re giving isn’t as watertight as you think it is?

We’ve discovered there’s a gap between the recommendations you may be giving your clients on business relief, and the reality of actually being able to put this into practice. In other words, your clients may not be able to achieve the IHT savings you’re saying they will. And it’s all because of a simple business clause that needs to be added to their Will.

Why a business clause is so necessary

When advising on IHT, you’re probably working on the basis your clients will benefit from maximum relief on their business assets upon death (100% for certain assets, 50% on others). But these maximum amounts can only be guaranteed if business assets are separately identified in their Will in a particular way.

A clause needs to be included to state that business assets are to be gifted to a specific beneficiary who preferably has no other tax exemptions. If they’re not separated out in this way, they’ll be considered part of the client’s residual estate, where there are often other tax breaks at play (spousal exemption for example). This can lead to doubling up on exemptions and wasting the business relief available ­– which could be a lot of money.

Under an illustrative scenario, with £900k business assets as part of a £2m estate and distributions to spouse and children, the failure to amend the Will could add a tax liability of over £100,000.

Adding a business clause is therefore critical (and simple to do). But the problem is, most Wills don’t.

Why do many Wills not contain this clause?

We have reviewed hundreds of Wills that should have had a business clause (or business trust) in place, but under 5% actually included it. This wasn’t a huge surprise. Unlike financial services, the Will industry isn’t regulated, which means the quality of Will-writing in the UK is alarmingly low. Many people become Will-writers without the STEP qualification and other training necessary to produce effective Wills.

Why haven’t you heard about this before?

We believe this oversight has arisen because it sits in the gap between financial and legal advice. IFAs would (understandably) assume that a Will written for a client with business assets would include all the necessary clauses to protect their interests. But because the quality of Wills is often poor, financial advisers are placing more confidence in the Will-writing process than is perhaps prudent.

What are the risks for IFAs?

Well, it raises some awkward questions. If you’re recommending a tax break that doesn’t deliver what’s promised, can this be considered mis-advice? It’s unclear where the legal obligation lies but if you advise your clients to get their Wills checked it will certainly give you peace of mind you’ve done your bit.

Take it one step further with a trust

Whilst a business clause in a Will is the key to maximising tax relief, it’s worth being aware of the extra benefits a business trusts can bring. Ringfencing assets in a business trust on death will ensure the maximum relief is obtained, but also protects these assets for immediate and future beneficiaries against threats like divorce and bankruptcy.

So, what’s should you do?

You’ll need to ensure any client you’ve advised on business relief in the past gets their Will reviewed for a business clause as soon as possible. And when advising in the future, you can make it clear from the start that this clause – or a trust – will also be needed to guarantee your advice will work.

Professional Paraplanner