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Excepted assets - IHT threat?

14 December 2018

Business Relief often means your business is safe from Inheritance Tax – but not always.

If you think Business Relief (BR) insulates your business from Inheritance Tax (IHT), you might need to think again – and read the small print.

While BR certainly can offer IHT relief, the picture muddies when you start factoring in "excepted assets", which can have a detrimental impact on any BR claim. Since excepted assets are not exempt from IHT, failing to recognise and address this issue could lead to an unwelcome and unexpected tax liability for the beneficiaries of the business owner's estate.

Any private ownership – including partial ownership – of a business is included in the owner’s estate for IHT purposes. However, a business owner may be able to access BR, which protects their share of the business from IHT once it has been owned for two years. This relief can be either 50% or 100% dependent on the type of business property.

However, an "excepted assets" test seeks to prevent personal assets being sheltered from IHT by being held within a company eligible for BR. The test means that BR is reduced to the extent the value of the shares reflect any excepted assets held by the business.

What is an excepted asset?

An asset is classed as ‘excepted’ if it meets either of two requirements:

  1. it is not required for future use in the business
  2. it has not been used wholly or mainly for the purposes of the business throughout the two years before the transfer.

Examples of common excepted assets include:

  1. Shares and other investments not used in the business
  2. Assets intended for private use
  3. Excess cash - the most commonly found excepted asset

In the absence of these rules, it would be easy to access BR on a non-business asset by simply placing it in a business wrapper. For example, a wealthy individual could transfer her expensive yacht into the company to shelter it from IHT on the basis that she would be eligible for 100% BR on the value of the company shares. She might then do the same with private cash by subscribing for more shares in the company without that cash being needed by the company, thereby treating the company as a piggy bank. The excepted asset rules aim to prevent this kind of abuses.

What about you?

It is usually quite straightforward to identify assets that are not being used in the business and may therefore not be exempt from IHT. However, when it comes to excess cash, it is not always easy to distinguish cash that is reasonably needed in the business as working capital from cash that is surplus to requirements – and the latter is at risk of being deemed an excepted asset. To add to the complexity, the legislation and guidance do not stipulate how much cash is an acceptable limit because the level will depend on the business itself – arguably, there is a risk in holding any amount of cash.

In truth, the circumstances of each business need to be assessed individually. For example, when looking at the ‘past use’ test, it may be necessary to look at the company accounts for at least the previous two years. When considering the first test requiring the asset to be needed for future use in the business, HMRC’s view is that there should be evidence of a positive decision or firm intention to use the cash which should be formally documented, such as in board minutes.

Don't be the exception

Establishing the existence of excepted assets is not always easy and will require in-depth analysis of the circumstances of each individual business. However, once an excepted asset is correctly identified, there are several ways it can be removed from the business and dealt with in an IHT-efficient manner; or converted (often immediately) into an asset that is not ‘excepted’. Understanding these rules will ensure you have certainty over the future tax liability of your business; and prevent any beneficiaries from receiving that unwanted letter.



Your St. James’s Place Partner will be able to advise you on which of our panel providers you would need to be referred to, given your particular circumstances for further advice in this area.

Investments made into BR qualifying schemes are intended for those willing to take a high risk with their capital and will not be suitable for most investors.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.


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