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Make mine a double! Effective estate planning for entrepreneurs through ‘double dipping’ wills

It is paramount that individuals with business assets take full advantage of Business Property Relief (“BPR”) through correctly structuring their Will.

An entrepreneur is in danger of wasting the generosity of BPR if they leave on death business assets eligible for BPR to their spouse. Assets passed to a spouse will normally be subject to the spousal exemption for IHT purposes.

Where certain conditions are met business assets[1] can pass free of IHT on death.

BPR – on assets held for at least two years – of 50% or 100% is available depending on the type of business property held.  100% BPR is available if an individual holds a business (sole trader), an interest in a business (partnership), shares in an unquoted company (including AIM listed shares) or securities in an unquoted company. 50% BPR is available if shares in a quoted company are held which give the individual control of more than 50% of votes or if land, buildings or machinery are held by an individual which are used by a business of which they had control.

Through careful estate planning a Will can be structured so married couples can claim double BPR. This is known as a “double dipping” Will and can lead to considerable inheritance tax (“IHT”) savings.

A double dipping Will is structured so that on the first death everything will be left upon a trust fund which will subsequently have two sub-funds:

  1. The Business Property Fund; and
  2. The Residuary Fund.

The Business Property Fund will receive all of the assets which attract BPR and will be held upon trust for a number of beneficiaries (usually family members).

The Residuary Fund will hold the remaining assets which do not attract BPR and will be held upon trust for the surviving spouse.

Anything left to the surviving spouse will not attract IHT because of the 100% spousal exemption. The Residuary Fund will be classified as an interest in possession for the surviving spouse which is exempt for IHT purposes.

The trustees will then – any time after 3 months – sell the BPR assets to the Residuary Fund. On the basis that the two funds are worth a similar amount, the assets can be swapped. This will leave the Residuary Fund with BPR assets and the Business Property Fund with chargeable assets in it.

However, the Business Property Fund will fall outside of the surviving spouse’s estate. The Residuary Fund will be relieved of IHT because of the spouse exemption but will be taxed as a discretionary trust subject to exit and anniversary charges. However, this is more manageable than the 40% IHT which the assets would have faced otherwise.

The double dipping structure will only work if the spouse holding the BPR assets dies first. However, the couple can equalise the split of BPR assets ensuring that it will also work no matter which spouse dies first.

The end result is that the surviving spouse will be entitled to distributions from the Business Property Fund and income from the Residuary Fund throughout the remainder of their life.

If a will is correctly structured families can take full advantage of BPR with a considerable IHT saving. Conversely, if a will is structured incorrectly this can lead to a hefty IHT bill.

[1] The same applies for certain agricultural assets.

If you would like any further advice on double dipping wills, tax and estate planning, please speak to Helen Freely, Partner in the Private Client Department on 020 7638 9271

This briefing was posted on 8 September 2016.