20th July 2023
An interest in a business can be the most valuable asset owned by an individual. Without the correct Inheritance Tax (IHT) planning, however, there is a risk that these interests can be subject to IHT at 40% on death. This reduces the amount the beneficiaries of the estate would receive in inheritance, whilst also causing potential cash flow problems.
What is Business Property Relief?
A relief, known as Business Property Relief (BPR), reduces the value of the ‘relevant business property’ in the case of an IHT chargeable event, such as death, or the lifetime transfer of assets to a trust. Relevant business property includes:
- A sole trade business or a partnership share
- Shares in an unlisted trading company
- Shares in a quoted trading company where the owner has voting control of more than 50%
- Land, buildings, or plant and machinery owned by an individual and used by a partnership or company the individual controls.
The rate of relief that will be given is 100% for assets within classes 1 and 2 above, whereas assets within classes 3 and 4 will receive relief at 50%. Shares on the Alternative Investment Market (AIM) are treated as unlisted shares for BPR purposes, and relief is therefore available at 100%.
What makes the relief so beneficial is that there is no monetary limit. Whilst BPR can be a hugely valuable relief for business owners, it can also be very easy to trip up on, due to the conditions that need to be met to qualify for the relief.
The individual must have owned the asset for at least two years at the point of the chargeable event and it must not be subject to a binding contract for sale. BPR will be restricted if the company holds ‘excepted assets’. Excepted assets are assets that are neither used for business purposes, in the two years preceding the transfer, nor required for future use in the business. An example of this would be large cash deposits which are not required for future use in the trade.
BPR will not be available if the business activity consists wholly or mainly of dealing in securities, stocks or shares, land or buildings, or making or holding investments. HMRC will look at all aspects of the business to determine if it is trading or investment, such as the business’ main activities, the assets and the sources of income. It is therefore critical for a business owner to ensure that the activities of the business comply with the conditions for relief.
HMRC will generally class ‘land-based’ businesses as investment businesses. One exception is property development businesses. The activity of dealing in land is not currently treated as relevant business property. However, a property development business constructing houses or other properties for resale should qualify for BPR.
BPR and trusts
BPR is also effective when settling relevant business property into a trust. The transfer into a trust will benefit from 100% relief (unless it is shares in a quoted trading company which carries 50% relief) and there would be no IHT charge on the way in. Similarly, the relief applies on distributions of business assets from the trust to beneficiaries once they have been held in the trust for at least two years. What makes transferring relevant business property into a trust more tax efficient, is that the donor can elect to claim gift holdover relief, which prevents the donor from suffering an immediate CGT charge on the deemed disposal of shares. The trust inherits the donor’s book cost of the shares and is then chargeable to CGT, when the trust eventually disposes of the assets. Settling business interests in a trust can be helpful with estate planning to pass on the benefit of the assets without relinquishing control.
There are many IHT planning opportunities available which involve business interests, and the potential benefits should not be overlooked. Please get in contact with the Private Client & Trusts team, or your usual haysmacintyre contact, for more information on how we can help.