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Setting Up Business Trust

Setting Up Business Trust

A Business Trust is a legal arrangement that holds business assets - such as shares, property, or intellectual property - on behalf of chosen beneficiaries. The trustee holds the legal title to the trust property and owns the assets on behalf of the beneficiaries, distinguishing between legal ownership (held by the trustee) and beneficial ownership rights (held by the beneficiaries). These assets are managed by trustees and can be protected and preserved beyond your lifetime.

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A business trust is not a separate legal entity like companies or corporations, but is a legal arrangement created by an agreement (declaration of trust) under law.

This structure offers:

  • Long-term protection of business assets
  • Greater control over how assets are distributed
  • Continuity for your business after death
  • Protection from legal risks such as divorce settlements or creditor claims

 

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    The process of creating a business trust involves drafting and signing a legal agreement, and the trust is created when the agreement is executed. While a trust can hold and manage business assets as trust property, it does not operate the business itself, but rather holds ownership rights and manages the trust property according to the terms of the agreement.

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    Why Use a Business Trust?

    If business assets are sold, the proceeds stay protected in the trust. Assets held in trust aren’t part of the beneficiaries’ personal estates, shielding them from:

    • Divorce settlements
    • Inheritance tax on their own estates
    • Creditor claims

    Business trusts can be tailored to the specific needs of clients, ensuring that the structure benefits the right people and is managed in their best interests. Trustees have a fiduciary duty to act in the best interests of the beneficiaries, providing peace of mind for clients and their families.

    This structure ensures your business legacy benefits the right people without being eroded by life’s complications.

    With the right expertise, a business trust can provide significant benefit and protection for clients and their families.

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    What is Business Relief for Inheritance Tax?

    Business Relief is a powerful inheritance tax (IHT) exemption. If your business qualifies, it can reduce the taxable value of your estate sometimes down to zero for IHT purposes.

    Income generated by business assets held in trust may also qualify for tax advantages. With proper planning, you can achieve maximum relief and minimize taxes, ensuring your estate is managed efficiently.

    With the right structure, you can guarantee that your beneficiaries receive the full benefit of Business Relief, not what’s left after tax.

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    What Business Assets Qualify?

    You may get 100% Business Relief on:

    • A business or interest in a business, including business interests held in business trusts
    • Shares in an unlisted company, including where trusts hold shares in companies on behalf of beneficiaries

    You may get 50% Business Relief on:

    • Shares controlling over 50% of a listed company
    • Land, buildings, or machinery used in a business you controlled or were a partner in
    • Similar assets held in trust but used by a business

    Shareholders in unlisted companies may use business trusts to protect their voting rights and ensure that shares are transferred to the intended beneficiaries.

    In partnerships, trusts can be set up to benefit partners or other partners, allowing them to hold shares or business interests in the partnership without direct management involvement.

    Time requirement: You must have owned the business or asset for at least 2 years before death.

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    What Doesn’t Qualify?

    You won’t get Business Relief if the company:

    • Mainly deals in investments, land, or securities
    • Is not-for-profit
    • Is being sold or wound up (with some exceptions)

    Assets also won’t qualify if they:

    • Also qualify for Agricultural Relief
    • Weren’t used mainly for business in the last 2 years
    • Won’t be used by the business going forward

    For example, if certain property is held in a trust and that property is not actively used in the business, it will not qualify for Business Relief. Additionally, assets or income distributed from a business trust to charities may not qualify for Business Relief.

    How to Maximise Business Relief in Your Will

    To claim the relief, your Will must direct the asset properly.

    Note: It is essential to include all relevant trust details such as the declaration of trust outlining the terms, duties, and responsibilities of trustees, and the transfer of business interests to beneficiaries in your Will. Make sure to complete and submit the necessary trust form to ensure the trust and its associated benefits are properly established.

    It is strongly recommended to consult an attorney to ensure the process is handled correctly and all legal requirements are met.

    Option 1: Business Clause

    A simple clause in your Will can state who receives your qualifying business assets. However, it is essential to have a clear agreement in place to ensure the correct transfer of business assets and to outline the terms, responsibilities, and duties involved in managing the trust. This allows Business Relief to be applied but doesn’t offer long-term protection. Once assets are transferred, they become part of the beneficiary’s estate and vulnerable to future claims.

    Note: When establishing a business trust, make sure to provide the correct address for submitting any required trust forms or documentation to ensure proper legal and administrative processing.

    Option 2: Business Trust

    This is the more strategic option.

    A Business Trust:

    • Allows the estate to claim Business Relief
    • Keeps the assets protected after your death
    • Prevents loss through divorce or debt claims
    • Reduces inheritance tax exposure in future generations
    • Appoints a trustee who is responsible for managing the trust property and must act in the best interests of the beneficiaries

    With assets held in trust, family members and other family members can receive interests in the business, such as dividends or profits, without being involved in direct management.

    The person appointed as trustee will manage and oversee the trust property, ensuring proper managing of business interests for the benefit of all beneficiaries.

    Generational Tax Planning

    By ring-fencing business assets in a trust:

    • You avoid unnecessary tax charges as wealth moves through your family
    • You increase long-term financial security for your heirs
    • You maintain control over how assets are used and passed on
    • By holding funds and money in trust, you can ensure these assets are protected and distributed according to your wishes across generations

    How HeirPlan Can Help

    At HeirPlan, we build tailored estate planning strategies designed for business owners. We:

    • Review whether a Business Trust suits your goals
    • Advise on the most suitable business structure for your needs, including the use of business trusts
    • Help you secure Business Relief
    • Ensure your company documents align with your Will
    • Structure your estate to minimise tax and maximise protection

    Whether you’re preparing for succession, planning a sale, or just starting to think about legacy—our team will guide you every step of the way. With the right planning, you can retain complete control over your business assets and ensure your legacy is protected.

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