Business Property Relief

Business Property Relief (BPR) could become a useful tool in helping to reduce a potential inheritance tax liability, but err on the side of caution as any removal of the current relief may leave you with a potentially unattractive asset.

As with agricultural relief, Business property relief is a relief. Any relief can be taken away and before you begin piling cash into assets that attract Business property relief be mindful of the costs and implications, if you then have to unwind the whole project because Business property relief is reduced or taken away completely.

To attract Business property relief your business should:

(a)       Not be subject to a binding agreement of sale
(b)       Pass an ownership test
(c)       Should be classed as relevant business property

(a)   Many businesses have been set up so that on death the business is forced to be sold to a partner or spouse. This will lose you the Business property relief so avoid that with a more appropriate agreement mentioned below.

(b)   The ownership test broadly means that the business should have been owned for the previous two years.

(c)   There are six categories of business that are classed as relevant property.

The first three attract 100% Business property relief:

(1)  A business or interest in a business.

(2)   Unquoted securities in a business that gave the transferor control of the  business. Control is taken to mean owning over 50% of the shares.

(3)  Lastly, unquoted shares in a trading company. A new approach taken to avoid IHT is to buy shares or securities in AIM listed stock, which also attracts BPR. After 2 years the assets will benefit from 100% BPR.

The three remaining types attract 50% relief:

(4)  Quoted shares, which gave the transferor control.

(5)   Land, buildings, machinery, and plant used by the business of which the transferor had control

(6)  As per (5 above) but where the property is held in trust in which the transferor had an interest in possession.

There is an issue relating to excluded categories. This basically means that any business will not be classed as relevant property if its whole or main business activities are securities, stocks and shares, land or buildings, and making or holding investments. You would not qualify for Business property relief in this instance. It doesn’t mean that if you own many of these assets that you will not attract Business property relief as they may be a genuine part of your business. You should speak to your solicitor or accountant about this to ensure you will qualify.

The definition of whole or main above basically means more than 50%. There was some useful guidance in a case of Farmer v The Special Commissioners (Farmer v IRC (1999) SpC 216) which had farming and letting elements. Many farms diversified to include caravans, for example, and some were caught because they lost Business property relief. The basic test in the Farmer v Commissioner showed that suitable capital was employed in the business in relation to its turnover. Capital meant employees, consultants, and overall time spent.

Care should be taken to ensure that as a business develops, it does not change to fall foul of these issues.

When you are putting together your succession plans in the event of death in relation to your business, be mindful not to use the old binding agreements above. Consider a straightforward arrangement such as a double option agreement. This is normally set up to allow the deceased’s surviving spouse the option to sell the business back to the surviving directors and also the directors the option to purchase. If either of the two parties takes up the offer the survivor must oblige. It is normal for the company to insure the main director whose policy pays out to the company, which in turn has the capital to complete the transaction and pay the surviving spouse for the assets.

Call one of our Inheritance Tax Advisers on 0800 0112825 or complete the enquiry form in confidence to see how we can assist you.

Click on the links below to discover more solutions to Inheritance Tax.

• Life Insurance To Pay the Inheritance Tax
• Inheritance Tax Trusts
• Nil Rate Band Discretionary Will Trust
• Purchased Life Annuity
• Business Property Relief
• Realigning of Assets
• Other Inheritance Tax Exempt Gifts