This article is predominantly aimed at spouses in business together, although many of the issues apply to all businesses.
Mirror Wills - for those of us old enough to remember the Chuckle Brothers’ “To Me, To You” game, this neatly sums up mirror Wills.
Both Wills are drawn up leaving everything to the surviving spouse, potentially leaving that survivor with a large Estate. The spousal exemption means that there is no IHT on the first death (i.e. because everything is left to the surviving spouse), and then usually the business was relieved from IHT on second death – all very IHT efficient. Importantly, the spousal exemption means that no other IHT reliefs are utilised when transferring assets to a spouse.
However, a raft of changes to the IHT rules for Business Property Relief (“BPR”) and Agricultural Property Relief (“APR”) mean that it is likely that a large number of business owners will now need to review and amend their mirror Wills to avoid IHT.
So, what is the issue?
Again, showing my age, Labour MP Roy Jenkins famously described IHT as:
“a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue”
The issue is, he is right!
Before the changes to BPR and APR, a married couple in business together could (typically) leave their share of business to the surviving spouse, safe in the knowledge that the control of the business was in trusted hands, with the added benefit that there would typically be no IHT on the value of the business on the survivors’ subsequent death.
For many, securing the future of the business is more important than the tax arising. Under the old rules, mirror Wills could solve both issues – a haven for the business and no IHT; under the new rules, things have become a lot more complex.
As set out by the Chancellor, and unlike the Nil Rate Band and Residential Nil Rate Band, your spouse cannot inherit the benefit of any of the £1m BPR/APR 100% relief threshold that is unused on the first death. By using mirror Wills, you are effectively losing relief on up to £1m of BPR/APR allowances. For Estates that are subject to IHT on second death, the tax cost of not fully utilising the BPR/APR relief on first death is likely to be 20% of the business value that passes to the surviving spouse.
So can we go 50/50 and still be Millionaires?
Potentially the answer is yes, but to properly answer this we need to briefly step away from tax considerations and focus on business ownership and control issues because, in order to avoid losing £1m BPR/APR relief, part of the jointly-owned business may need to pass to someone who is not your spouse.
The Generation Game?
For some, this is ‘relatively’ straightforward: pass some of the ownership to (say) a trusted relative (who is not your spouse). Many businesses have succession plans involving children of the owners, and therefore, changing the Will to bring them into ownership rather than passing the share of ownership to the surviving spouse might solve the issue.
However, there is an extremely important point that needs to be considered whenever business ownership involves more than one person – what happens if circumstances change?
To protect the value of the business, you may also need to construct an agreement that covers changes in the circumstances of the owners that might adversely affect what is otherwise a successful business. The list is not exhaustive, but you may need to consider how to deal with:
- A breakdown in the relationship between owners
- Changes in the marital status of the owners
- An owner wishing to exit the business or sell up
- Death or incapacity of an owner
- Insolvency of an owner
Typically, and in conjunction with your solicitor, we always strongly recommend that agreements are drawn up to allow the business to continue to trade successfully, and grow in value, regardless of whether any of the issues above arise.
Countdown!
The clock is running, and the new rules come into force on the 6th of April 2026. Now is the time to revisit plans; revisit Wills; and consider whether other changes need to be made.
The IHT cost of getting it wrong could be significant. Because of this, we are looking at a range of solutions for clients and would be very happy to discuss your needs with you.
