Business property relief

Business owners and investors should ensure they qualify for one of the most valuable tax reliefs, allowing them to pass on their business free of inheritance tax.

Inheritance tax (IHT) can be more punitive than either income tax or capital gains tax, generally being charged at 40 per cent of the net value of an asset, which has often been acquired out of income or gains previously subject to tax.

What’s the solution?

Business property relief (BPR) provides 100 per cent relief from IHT for a qualifying interest in a business, whether this constitutes a sole trade, a share in a partnership, assets used in a qualifying business or shares in a qualifying company. In order to qualify, the business or company must be carrying on a qualifying trade. While most trading activities will qualify there are a few excluded activities, such as dealing in securities and shares, dealing in land and property, or making or holding investments. Property development is, however, a qualifying activity.

All owners of the business can qualify, whether they are involved in the running of the business or are just an investor. Additionally, while the relief is aimed at private businesses, other businesses can also qualify, such as those quoted on the Alternative Investment Market (AIM) or subscribed for under the Enterprise Investment Scheme (EIS), and there is no limit to the value of the relief.

IHT is not only payable on death, but on certain lifetime gifts (such as gifts into trust) and by trustees on certain events during the lifetime of a trust. BPR can be claimed on all occasions of charge. 

Qualifying for BPR

In simple terms, a business must be wholly or mainly a trading business, taken to mean more than 50 per cent trading, taking into account  income from different sources, how directors and employees spend their time and the make-up of the business’s balance sheet. It is also necessary to review assets which are owned by the business but are not used in the trade, as these remain exposed to IHT.

Pitfalls

As with all areas of tax law, the rules are detailed and there are pitfalls for the unwary. However, with the IHT rate at 40 per cent, the benefit of qualifying for BPR is significant and it could be very costly for beneficiaries of an estate if a business did not qualify for relief but could have done so with some small adjustments to how it operated.

Simply owning or having an investment in a business does not necessarily mean that BPR will be available. It is important to review whether the business meets all the qualifying criteria.

It must also be remembered that businesses change and evolve over time. A business which may have qualified for relief several years ago, may no longer do so. Just as a Will should be kept under review as personal circumstances change, entitlement to BPR should also be continuously reviewed.

We can help

Passing on or retiring from your business can take a number of different routes, giving rise to a potentially complex variety of tax issues. As part of an overall review of your strategy to identify the tax risks and opportunities, we can undertake a BPR review to establish whether your business or investments qualify for relief and, if not, explore any steps that can be taken to rectify the position. This can either be undertaken as a standalone exercise on the business or as part of an overall IHT review.

If you are interested in reviewing your exposure to inheritance tax, please contact your usual RSM adviser.