What are the inheritance tax (IHT) implications of how business property is held?
Trading businesses, whether held as sole traders, partnerships or in a company, generally qualify for 100% business property relief for inheritance tax purposes. Where property used in the trade is held within the business, it too will qualify for 100% relief. But it is common for property to be held outside a business – this may be purely historical or in an effort to protect the property against business failure. Often overlooked are the implications of how this affects the business property relief for what is often a valuable asset. Relief is now 50% at best and nil at worst.
It is worth looking at the three types of business structure:
Sole trader – One might think there is no issue – one individual owns the business and he also owns the property. But what if the property is not included on the business balance sheet? Is it part of the business? If it is not part of the business then all relief is lost. For safety it should be included on the balance sheet. But what if the property is not owned 100% by the sole trader, e.g. jointly owned by husband and wife? This means that not only will the spouse’s half not qualify but, again, arguably even the sole trader’s half is not a business asset and therefore relief is lost.
Partnership – A property owned outside a partnership by one or more partners will qualify for relief at 50%. If a partner’s interest in the property is held jointly with a non-partner, e.g. spouse, then the non-partner’s share will not qualify for any relief. There is no minimum interest a partner must hold (compare companies below).
Company – It is quite common for a property used by a company to be held by the shareholders outside the company. In this scenario relief is restricted to 50% but only if the person, together with connected persons (e.g. a spouse), controls the company. If there is no control then no relief. Thus, for example, in contrast to partnerships, a non-shareholder whose spouse is a controlling shareholder can gain relief. On the other hand if two individuals who are not connected (and for this purpose siblings are not connected) each own 50% of a company then there is no relief for a property held outside the company.
If you would like to discuss the IHT implications regarding your business property, please contact Graham Buckell firstname.lastname@example.org.
As always, you are reminded that this article is generic in nature and you should take no action based upon it without consulting your professional advisor.