Specialist Will

A Will designed for family business owners that can double the 40% tax saving available on the shares in the family business

What is the 2FT Will?

The 2FT Will is a way of structuring a Will that (on death) provides the family with flexibility and protection and enables maximum use of the Inheritance Tax (IHT) relief applicable to business assets, most notably a share in a family trading business.

In a best case scenario the available tax relief on the assets can be doubled. Some versions of the planning enabled by this Will have been known as ‘Double Dip’ planning for this reason. These historic models can be unwieldy to implement quickly, and usually lead to unnecessary tax charges.

Who is this for?

This type of Will is suitable for almost any family – there is no real disadvantage to the Will.

The significant double IHT savings can be gained by anyone who:

• Is married or in a civil partnership; and

• Owns shares in a family trading business (or other assets that qualify for relief from IHT).

It applies to the assets of the first to die of the two spouses[1], and can double the tax relief.

Is the planning risky?

No – this planning has been tested with HMRC and uses well understood and accepted reliefs. It relies on two very fundamental tax reliefs: Business Relief over qualifying business assets; and the Spouse Exemption. It has been approved by top solicitors and barristers, and does not give rise to any additional reporting obligations (it is not considered an ‘Inheritance Tax Scheme’).

How does the plan work?

The Will is specially structured to enable the following post-death planning.

The family business owner dies, leaving all their assets to a Trust in the Will. The Trust provides all the flexibility, control, and asset protection that any good Will Trust should. Additionally, the Trust is divided into two parts (sub-funds).

• The first part (the Family Fund) would receive all assets that qualify for IHT relief, most notably the shares in the trading business, and would be held for the whole family.

• The second part (the Spouse Fund) would hold everything else, also for the whole family but the surviving spouse would have a legal right to income (qualifying for IHT relief).

So on the death of the business owner, there is no 40% IHT charge. This is the standard saving.

If nothing else is done, this is often the best structure for holding the assets. The spouse can have whatever support is needed (or agreed), including use of property, receipt of income, and interest free loans if they need access to the capital. Other family members can also be supported as needed.

While maintaining all those advantages, it is usually most tax efficient for the Trustees to exchange assets between the two distinct parts of the Trust – it can be thought of as the Spouse Fund using assets to ‘purchase’ the business shares from the Family Fund (at full market rate). Note that because everything remains in the Will Trust, this asset exchange is not actually a purchase, sale, disposal, or transfer of any kind, and as a result is not a taxable event (no IHT, CGT, SDLT or Stamp Duty).

How does the double tax saving work?

On the death of the second spouse, their estate will be subject to IHT (at 40%) on their own assets and all assets held in the Spouse Fund. This is subject to any claims for relief.

The assets held in the Family Fund are not subject to any IHT charge on the death of the spouse. The asset exchange within the Trust results in normal (taxable) assets being held in the Family Fund which immediately shelters them from further tax on the spouse’s death.

Provided the surviving spouse lives for a full two years following the asset exchange, the double tax saving kicks in: shares in the business will once again qualify for IHT Business Relief on their death. This gives rise to the second round of tax savings from 40% IHT.

The Family Fund avoids the 40% charge, but is subject to a different IHT charge of up to 6% every 10 years, which slowly reduces the tax saving as decades pass.

Can the extra saving fail?

If the spouse does not survive the 2 years from the asset exchange, there is no second round of savings – but the family is no worse off for attempting to use this planning.

If the spouse survives for 40 years, half the additional tax saving will be lost over time, and so (theoretically) at 80 years the whole of the additional saving would be lost. These can be mitigated with further planning if the family is willing to give up the protection of the Trust.

If the laws or the circumstances change so that this planning is no longer suitable, the family can choose not to implement this planning. There would be no loss resulting from that decision.

Conclusion

This planning can save 40% IHT on the value of the family business, in addition to the usual saving at that level. And there are no realistic circumstances in which this leads to additional tax.

If you think this planning may apply to you, or to your clients, please contact our expert team who can help put in place a suitable Will that enables this potential saving for the family.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at July 2024. Specific advice should be sought for specific cases. For more information see our terms & conditions.