If you’re a business owner, Business Property Relief is a valuable Inheritance Tax relief. It could provide up to 100% relief when you die, as long as you have owned the business for at least two years.
Even if you don’t own your own business, investing in a trading company can also be a useful way of mitigating Inheritance Tax.
Here, we look at how Business Property Relief works, and how it can benefit you as a business owner or as someone with a potential Inheritance Tax liability.
How a business owner can benefit from Business Property Relief
Back in 1976, Business Property Relief (BPR) was introduced to ensure that, after the death of an owner, a family-owned business could survive as a trading entity without having to be sold or broken up to pay an Inheritance Tax liability.
If you have a business or an interest in a business, whether a sole trader, partnership or limited company, you can claim 100% relief provided it’s inherited as a going concern. This means it is exempt from Inheritance Tax.
You can get 100% relief on:
- A business or interest in a business
- Shares in an unlisted company
You can get 50% relief on:
- Land, buildings, plant or equipment you own and that is wholly or mainly used by the business
- Shares controlling more than 50% of the voting rights in a listed company
- Land, buildings, plant or equipment used in the business and held in a trust that it has the right to benefit from.
Note that you must have owned the business or asset for at least two years to claim the relief.
There are some circumstances where BPR would not be available. For example, the following businesses do not qualify if more than half of the business involves:
- Dealing in stocks and shares
- Dealing in land or buildings
- Making and holding investments.
BPR is a worthwhile consideration if you’re a sole trader, partner or shareholder and you’ve owned the relevant business property for more than two years. If you think this applies to you, please get in touch for advice.
Using BPR if you’re investing in a business
Since the introduction of BPR in 1976, governments have recognised the value of encouraging people to invest in trading businesses, regardless of whether they run the business themselves.
It is therefore possible to take advantage of BPR even if you’re not a business owner yourself. For example, perhaps you are aware that you have an Inheritance Tax liability, but:
- You don’t want to give away large sums of money even if gifting is an option
- Your beneficiaries are too young to inherit now
- You find trusts too expensive or complicated
- You are worried about the costs of later life care
- You want to retain access to your money in case you need it
- You may be uncomfortable giving away large sums of money that it’s taken you a lifetime to earn.
Investing in shares expected to qualify for Business Property Relief (BPR) means you could pass these on free from Inheritance Tax on death, as long as you have held the shares for at least two years at that time. And, the investment would stay in your name, meaning you should be able to access some or all of the capital later on if you need it.
Since 2013, AIM-listed shares can also be held within an Individual Savings Account (ISA) which means that investors can hold BPR-qualifying shares and benefit from the tax efficiencies of an ISA.
The benefits of a BPR-qualifying investment include:
- Making a gift usually means you have to wait seven years before it becomes free from Inheritance Tax. An investment into a BPR-qualifying company can be passed to a beneficiary free of Inheritance Tax providing it has been held for just two years
- You retain control as the wealth remains in your name
- BPR-qualifying investments do not use the Inheritance Tax nil-rate band, meaning you can use this band on less liquid assets which are difficult to place outside of the estate for tax purposes.
While there are benefits to BPR-qualifying investments, you should take the following risks into account:
- For a company to qualify for BPR, it cannot be listed on a main stock exchange. These companies are therefore likely to be riskier, the value could fall, and you may get back less than you invest
- Tax rules could change in the future. There is no guarantee that a BPR-qualifying company today will remain so in the future
- Investments in unquoted companies or those quoted on the AIM can fall or rise more sharply than shares in larger companies. These shares may also be harder to sell.
Get in touch
If you’re a business owner, or you’re interested in discussing a potential Inheritance Tax liability, we can help. Email email@example.com or call 01454 416 653.