Craig Simpson, tax partner at Bates Weston, looks at Business Relief – formerly known as Business Property Relief (BPR) – and Inheritance Tax Planning.
Although only 3.6% of estates are required to pay the 40% Inheritance Tax due on a deceased’s estate, it is not surprising that those likely to fall within its scope are minded to find ways to reduce their tax burden.
Business Relief or Business Property Relief (BPR) was designed to prevent the forced sales of trading businesses to settle Inheritance Tax bills. It can be applied to four categories of trading business assets.
- A sole trader or partnership
- Shares and securities in an unlisted trading company
- Controlling shares (50%+) and securities in listed trading companies
- Land and buildings or plant and machinery used by a business but owned privately by either a partner or controlling shareholder
Investment businesses are generally not eligible for the relief, although companies with a mix of trading and investment assets can qualify for full BPR in certain circumstances.
The relief is subject to certain conditions. They include ownership of the asset by the deceased – or their partner/spouse – for at least two years prior to death, or a direct replacement of an asset within 3 years, or a second transfer occurring within 2 years as a result of a death.
There are clear areas where BPR does not apply. Most obviously if a business was already subject to a binding contract for sale at the date of death. Remember, the point of the relief is to avoid the need for sale to pay an IHT bill. If a sale is already contracted, then it is not the death or IHT that precipitated it.
Only trading companies, or those that are not wholly or mainly investing are entitled to BPR. If a business falls within the definition of a “trading” business, the whole of the business is subject to BPR. When determining whether a business is defined as trading, the balance of investment and trading assets are considered. Some assets will be excluded from this calculation. These are termed “excepted assets” and include any asset which is not used currently – or will not be used in the future – by the business. Examples might include holiday homes, cars or boats, large cash balances above the working capital requirements of the business or stocks and shares.
Other points to note include:
- Furnished Holiday Lets generally do not qualify for BPR as HMRC views them as an investment activity.
- Most taxpayers are aware that if a gift is given during the donor’s lifetime, and the donor survives for seven years from the date of the gift, the transfer is exempt from IHT.
In summary, as a business owner, if your estate is likely to have to pay Inheritance Tax, it is worth considering at an early stage how Business Property Relief applies to you and your potential beneficiaries, how it is interwoven with lifetime gifts, your future plans for your business and your personal assets.
Craig Simpson comments;
“For many business owners the path tends to be an accumulation of investment assets funded through trading profits. Over time this can see the loss of BPR for a trading company. It is therefore important to track the relative values to a point that IHT reliefs can be maintained by moving investment assets out of the trading company at the optimum time.”
In short, talk to us sooner rather than later about tax planning.
This guidance is generic in nature and does not constitute advice. You should take no action based upon it without consulting ourselves or your own professional advisor.