UK: Inheritance Tax - Business Property Relief

Last Updated: 14 August 2013
Article by Smith & Williamson

Introduction

Business property relief (BPR) is a one of the most important reliefs available within the scope of inheritance tax (IHT) as it reduces the value of certain transfers liable to IHT by up to either 50% or 100%.

BPR can be claimed either on death or on any other chargeable event. It is available on certain kinds of business assets that qualify as 'relevant business property' provided the transferor fulfils a minimum ownership period.

Relief Available

BPR is available on the transfer of relevant business property. Relevant business property falls, broadly into five groups, two of which qualify for 100% relief and three that qualify for 50% relief, as detailed below.

Asset Relief
A business or share of a business (i.e. a sole-trade or share in a partnership). 100%
Shares in an 'unquoted' company (which includes those traded on the AIM, USM, OFFEX and similar markets). 100%
Shares or securities in a 'quoted' company that, together with any other shares or securities owned by the transferor, give control of the company 50%
Buildings, land, plant or machinery used in a business of either a company of which the transferor had control or a partnership of which he was a partner. 50%
Buildings, land, plant or machinery held in a trust and used in the course of a business carried on by a beneficiary with an interest in possession. 50%

Relevant Business Property

While the above categories encompass many businesses, 'relevant business property' excludes a number of types of business that will not qualify for BPR. The business will not qualify as relevant business property if it is 'wholly or mainly' concerned with:

  1. dealing in stocks, shares or securities;
  2. dealing in land or buildings; or
  3. the making or holding of investments.

There are however some exceptions to these exclusions, such as if the business is acting as a market-maker (eg dealing with stocks and shares as a stockbroker); if the business holds these assets as trading stock (eg a property developer holding land); or if a company is a holding company for other qualifying businesses.

It is important to note that the relevant business property test is a 50%+ test. In order to establish whether a business qualifies as relevant business property, its activities must be considered as a whole and if the non-qualifying activities exceed half of the company's activities then it will not qualify for BPR.

Special consideration must be given to businesses that rely heavily on property for their revenues, such as farms and estates and holiday lettings (notably caravan sites). In determining the division between qualifying and non-qualifying activities within a business, a number of factors should be considered to form a global view. The factors to consider include the nature of the business, the services provided, the level of management involvement, the contributions to turnover of different parts of the business and the profits that are attributed to different parts of the business. There is unlikely to be a single pre-eminent deciding factor.

Ownership Requirements

The business assets must be owned by the transferor for a period of two years before the relevant transfer in order to qualify as relevant business property; however there are reliefs from this requirement in certain circumstances, which are detailed below.

Successive Transfers

This relief concerns transfers of relevant business property that occur as a result of death and deem the business assets to be relevant business property in the following circumstances, where they might not otherwise meet the two year ownership requirement.

Where a person receives an interest in relevant business property on the death of their spouse, they will be treated as having owned it for any period that their spouse owned it.

Where property would qualify as relevant business property, but the transferor has not owned the property for the required two years, BPR may still be available if the transferor had received the property from another person through a transfer of value and the following two requirements are satisfied:

  1. the property had qualified as relevant business property when it was originally transferred to the transferor, and
  2. either the earlier transfer to the transferor or the later transfer by the transferor was made as a result of death.

Replacement Assets

Property may also be treated as satisfying the two year ownership requirement where it replaces (either directly or indirectly) other relevant business property. In order to qualify for this relief, the replacement asset needs to qualify as relevant business property and must be bought within three years of the disposal of the original relevant property.

Pitfalls to Avoid

There are various pitfalls that may stop BPR being available. The two main pitfalls to avoid are where the asset is subject to a binding contract for sale and where the company holds substantial amounts of investments.

Contracts for sale

If business property is transferred when it is subject to a binding contract for sale then the transfer will not qualify for BPR. For example, if the transferor has agreed the sale of his business and then transfers the business into a trust for the benefit of his children, the immediate IHT chargeable transfer would not qualify for BPR.

This is more commonly an issue with shareholders' agreements that require the personal representatives of a deceased shareholder to sell their share in the company or partnership to the surviving members. If there are such arrangements in place, then it may be possible to use cross-options in order to maintain the availability of BPR, while keeping the basic intention intact.

Excepted assets

Having established that a business qualifies for BPR, it would be tempting to load it with investments and cash reserves so that 51% of the value of the business is attributable to its qualifying business activities and claim BPR for the full 100% of the assets. However, this is subject to an anti-avoidance rule that strips out the value of a transfer that is attributable to 'excepted assets'. If, for example a business included 'excepted assets' accounting for 20% of its value, only 80% of the value of any transfers would be eligible for BPR with the remaining 20% being chargeable.

Excepted assets are identified as all assets except those that:

  • have been used wholly or mainly for the purposes of the business concerned throughout the two years preceding the transfer; or
  • are required at the time of the transfer for the future use for the purposes of the business.

The second requirement may be important for businesses that need to maintain a high level of capital reserves, such as businesses that have poor cash-flows and require a lot of capital in order to maintain the business. It is also useful to consider for businesses where there are opportunities to expand or acquire other businesses, such as farmers who intend to buy further land when it becomes available. However, the business must be able to provide a commercial justification (usually a specific purpose) for holding such reserves in order to qualify for this future use provision and not merely a general intention to use it for business purposes.

Further requirement for lifetime transfers

Where the donor does not survive the seven year period there is a further condition to be met when the failed potentially exempt (PET) lifetime gift comes into charge.

Subject to provisions for replacement property, the assets must have been owned by the recipient throughout the interim period and (with the exception of 'quoted' shares) they would need to qualify for BPR for the recipient at the time of the donor's death.

This also applies when considering any additional IHT payable on an immediately chargeable lifetime transfer within the seven year period

Summary

There are various ways in which people can pass wealth on to the next generation whilst managing their IHT exposure by not missing out on statutory reliefs and exemptions open to them. This means planning over the long term rather than 'at the last minute'.

BPR is an extremely generous relief which can exempt up to 100% of the value of qualifying assets. However we regularly come across cases where this relief is jeopardised because, for example, an individual has invested excess cash in non-trading assets.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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