Will planning issues are often easier to understand when viewed through a real client scenario. This article is based on a recent case we advised on at WillPack, with names and certain details changed for confidentiality.
It highlights a common issue for married couples with business assets. Leaving everything outright to the surviving spouse may feel like the simplest approach, but it is not always the most effective from an inheritance tax (IHT) perspective. In particular, it demonstrates how a Business Property Relief Discretionary Trust can play a key role in preserving relief that might otherwise be lost.
The Background
Paul and Anne are a married couple, both aged 68. They have three adult children and significant family wealth.
Paul previously sold a larger business but still operates a smaller business. He also owns a commercial yard from which the business is run. Anne is retired.
Their approximate assets were as follows:
- Main residence: £200,000 (joint names)
- Rental property: £180,000 (joint names)
- Commercial yard used by the business: £500,000
- Business: £400,000
- Cash savings and ISAs: £900,000
- Cars and personal possessions: £80,000
- Paul’s undrawn pension: £200,000
Their wishes were:
- on the first death, everything should pass to the surviving spouse; and
- on the second death, the estate should pass equally to their children.
The difficulty was that part of the estate potentially qualified for Business Property Relief (BPR), and that relief could be lost if the wills were drafted too simply.
The Issue
Under the Inheritance Tax Act 1984, assets passing between spouses and civil partners are exempt from IHT. As a result, leaving everything outright to the surviving spouse usually means there is no IHT on the first death.
Paul’s business is unlikely to continue for long after his death. This matters. If Paul left the business assets outright to Anne and the business later ceased or the assets were sold, any BPR that might have been available on Paul’s death could effectively be wasted. The value of the business, or the sale proceeds, would then fall into Anne’s estate. No BPR would be available, and those assets would be taxable on her death.
This is precisely the scenario where a Business Property Relief Discretionary Trust can be used to ensure relief is not wasted.
A Brief Overview of Business Property Relief
Business Property Relief is a relief from IHT for certain business assets. In broad terms:
- some business assets may qualify for 100% relief (from April 2026, limited to the first £2.5 million of qualifying assets); and
- others may qualify for 50% relief.
In this case, the assumption was that:
- the business itself had the potential to qualify for 100% BPR; and
- the commercial yard had the potential to qualify for 50% BPR.
BPR is highly fact‑specific, and we are not able to confirm the availability of BPR.
The Problem with a Simple Gift
If Paul died first and left all assets to Anne outright:
- there would likely be no IHT on the first death, due to the spouse exemption; but
- the full value of the business assets would fall into Anne’s estate if the business did not continue.
Using a Business Property Relief Discretionary Trust
The most effective planning to reduce the potential IHT bill in this situation would be to include a Business Property Relief Discretionary Trust in Paul’s will.
A discretionary trust is a trust under which trustees hold assets for a class of potential beneficiaries, such as the surviving spouse and children, and decide how and when those beneficiaries should benefit.
In this case, the business and the commercial yard could pass into the trust on Paul’s death. If BPR applied at that point:
- the available relief would be used immediately;
- the assets, or the proceeds of any later sale, would sit outside Anne’s estate; and
- the trustees would retain flexibility to benefit Anne and the children as needed.
Worked Example
Based on the figures supplied, the total non‑pension estate was approximately £2.26 million.
Scenario 1 – Everything passes outright to Anne
On first death – No IHT, due to the spouse exemption.
On second death:
- Estate: £2,260,000
- Two nil rate bands available
- Residence Nil Rate Band: This requires specific consideration. The estate exceeds the £2 million taper threshold, and the Residence Nil Rate Band is tapered from £350,000 to £220,000. However, as the property is worth £200,000, the Residence Nil Rate Band is capped at £200,000 in any event. It is worthwhile to consider, however, that if the estate did increase in the future (which it would from April 2027 when pensions are brought into the IHT estate), this could taper the Residence Nil Rate Band further and increase the IHT liability.
- Total allowances: £850,000
- Taxable estate: £1,410,000
- IHT at 40%: £564,000
Scenario 2 – Business assets pass into a discretionary trust
On first death:
- Business: £400,000 (assumed 100% BPR)
- Yard: £500,000 (assumed 50% BPR)
- Chargeable transfer into trust: £250,000
- Covered by Paul’s nil rate band, so no IHT on first death
On second death:
- Anne’s estate reduced to approximately £1.36 million
- Total allowances: £600,000
- Taxable estate: £760,000
- IHT at 40%: £304,000
Estimated saving: £260,000
This illustrates how a Business Property Relief Discretionary Trust can materially reduce the family’s overall IHT exposure, even after allowing for potential trust charges.
Advantages and Disadvantages of the Trust
Advantages
- makes use of available BPR on first death;
- keeps business assets and future growth outside the survivor’s estate;
- allows flexibility for the spouse and children; and
- can significantly reduce the eventual IHT bill.
Disadvantages
- the trust falls within the relevant property regime;
- there may be ten‑year anniversary and exit charges;
- trustees have ongoing tax and administrative responsibilities.
In cases of this type, those trust charges are often outweighed by the cost of losing BPR altogether.
A Further Point
A further issue considered was whether Anne’s will should also include a Nil Rate Band Discretionary Trust if she were to die first.
If Anne died before Paul and left her estate outright to him, this would increase the value of Paul’s estate on a later death. Given the overall size of the family wealth, that could push his estate further above the £2 million threshold at which the Residence Nil Rate Band begins to taper, reducing or eliminating that additional allowance.
By contrast, using a Nil Rate Band Discretionary Trust on Anne’s death would keep part of her estate outside Paul’s taxable estate. That may help to limit the extent of any Residence Nil Rate Band taper on Paul’s death.
This type of planning involves a separate balancing exercise. It uses the first spouse’s nil rate band and brings the relevant property regime into play, with potential ten‑year anniversary and exit charges. Even so, where the survivor’s estate is likely to exceed £2 million, it can be a useful option to consider alongside a Business Property Relief Discretionary Trust used on the first death.
Conclusion
This case demonstrates why will drafting for business owners often needs to go beyond the default approach of leaving everything outright to the surviving spouse.
Where business assets may qualify for BPR, timing is critical. If the business is unlikely to continue, it may be best to use the relief on the first death.
A Business Property Relief Discretionary Trust will not be suitable in every case. However, for families with trading businesses, business premises and estates above the IHT thresholds, it can be an effective way to reduce the inheritance tax burden.
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