For more than 40 years, Business Property Relief (BPR) has allowed business owners to pass on qualifying assets free from Inheritance Tax (IHT). If an asset qualifies for BPR, the value of the asset is reduced by either 50% or 100% when calculating the IHT liability.
Careful BPR planning can help clients to plan for the future, and make sure they have the necessary arrangements in place to qualify for BPR on the transfer of a business.
What is Business Property Relief?
BPR is a valuable Inheritance Tax relief that can reduce the value of relevant business property when it is transferred either in life or on death.
Business owners can receive relief at either 100% or 50% dependent on circumstances and the asset. Remember also that BPR is only available after an ownership period of two years or more.
What types of property qualify for BPR?
There are several categories of property that can qualify for BPR. These include:
- Property consisting of a business or interest in a business (100% relief)
- Control holdings of unquoted securities in a company (100% relief)
- Unquoted shares in a company (100% relief)
- Control holdings of quoted shares in a company (50% relief)
- Land, buildings, machinery, or plant used by a company controlled by the transferor, or by a partnership of which the transferor was a member (50% relief)
And, for lifetime transfers only:
- Settled land, buildings, machinery, or plant in which the transferor had an interest in possession and used in his business (50% relief)
When is BPR not available?
BPR is not available in respect of a business, or shares in a company that is:
- A ‘not for profit’ or is not run on a commercial basis
- Being wound up or is subject to a contract for sale
Additionally, you can’t claim BRP if the company ‘wholly or mainly’ deals in securities, stocks or shares, land or buildings or in the making or holding of investments. A business which only generates investment income will not attract BPR, so this excludes:
- Residential or commercial property letting businesses
- Property dealing businesses
- Serviced office businesses
It is important to consider the nature of the business at the time of the transfer. For example, a business which started as a house builder, but at the time of the transfer had not recently built any houses and was selling off its land bank wouldn’t qualify for BPR.
Businesses concerned with caravan sites, furnished lettings, furnished holiday lettings, and commercial letting can be particularly problematic. The two tests that need to be applied are:
- Whether the activities carried on constitute a business
- If they do, is business property relief precluded because that business was one of ‘wholly or mainly holding investments’?
There have been two recent court cases that illustrate these issues.
Two recent cases that highlight how BRP can be applied
Ross v HMRC
This case concerned a furnished holiday let business. Eight holiday cottages in Cornwall were let as self-catering units. These cottages were adjacent to a hotel which the deceased had previously owned, and the guests from the cottages were allowed to take advantage of some of the hotel’s amenities. Various other additional services were offered, such as a mid-week clean and change of bed linen.
The executors of the estate argued that the provision of these ‘extras’ changed the nature of the business from a land investment to one providing a holiday experience. They argued that the investment in land was a subordinate part, therefore the business qualified for business relief.
The Tribunal did not agree. While they accepted the level of services was more extensive than those provided in other furnished holiday let businesses, they concluded that the character of the business remained the exploitation of land in return for rent.
Vigne v HMRC
This case concerned a livery stable business on a large piece of land. The personal representatives of Mrs Vigne argued that her business was significantly more than letting/licensing the land for use by owners of the horses as she provided valuable additional services, such as health checks of the horses, providing them with hay and worming products, and removing manure from the fields.
Here, the Tribunal accepted the argument and concluded that ‘no properly informed observer could have said that the deceased was in the business of just holding investments’.
Business Property Relief planning ideas
Planning to take advantage of BPR is a specialist area. However, there are a couple of simple planning aspects.
Passing on business property
Consider an individual who owns shares in a private trading company that qualified for BPR. If the individual dies, then there will be no IHT on those shares and there will be an uplift in the Capital Gains Tax (CGT) base cost to market value at death.
Therefore, assuming no changes in legislation, the business property can be passed on free of tax.
Consideration may be given to leaving this property to a discretionary will trust to crystallise the BPR (rather than to an exempt spouse or civil partner). The business property should be the subject of a specific gift otherwise the relief will be apportioned over the whole estate including the spouse/civil partner exempt portion.
Of course, there may be reasons outside tax planning why business owners may not want to retain the business property until their death.
Transferring business property into trust
An individual with shares in a private trading company that qualified for BPR could transfer those shares into a discretionary trust with no initial IHT charge.
This may be done in anticipation of a sale of the shares with the proceeds, then subject to the relevant property regime rather than being inside an individual’s estate for IHT purposes. CGT implications would need to be considered.
Additionally, individuals would need to consider the potential impact of the settlor interested trust provisions (Income Tax) and gift with reservation rules (IHT).
Get in touch
If you or your clients need any help with Business Property Relief or more general tax planning, please introduce them to us. Email firstname.lastname@example.org or call 01454 416 653.