Business property relief and inheritance tax planning

Business property relief and inheritance tax planning

In the world of inheritance tax planning, the term “relievable property” refers to assets that qualify for business property relief (BPR), agricultural property relief (APR) or woodlands relief.

In this article, we will focus primarily on BPR to explain why this could be a very powerful tool for reducing your inheritance tax (IHT) liability.


What is business property relief?


Business property relief is an inheritance tax relief available to individuals who own business assets, including shares, in any qualifying businesses.

Simply put, investments that qualify can be passed on free from inheritance tax upon death of the investor, provided the assets have been owned for at least two years at that time. 

It sounds fairly straightforward but, as with all things finance-related, it comes with a few conditions and caveats.


What qualifies for business property relief?


Broadly speaking, investments in businesses that carry on a trade, rather than investment activities, could qualify for 100% BPR. That includes:

  • Shares in an unlisted company
  • A sole trader business or share in a partnership
  • Shares listed on the Alternative Investment Market (AIM).

There are other assets which qualify for 50% BPR including:

  • Shares in quoted trading companies in which you have voting control
  • Land, buildings or machinery which you own and use in your partnership or a company that you control.

BPR is available to both working and passive shareholders and there is no minimum percentage holding requirement. 

The relevant business property qualifies for BPR when the individual (or trust) has owned it for at least two years. It may also be available where the ownership period can be aggregated with a spouse or civil partner, if transferred when the spouse dies. It can also be applied if the business is sold but then replaced within three years, if the combined ownership is at least two years of the previous five.


What are the main advantages of business property relief?

  • Results can be achieved relatively quickly due to the short two-year qualification period. This makes it particularly helpful for older clients who are yet to look at estate planning
  • Allows a greater degree of control and flexibility than gifting and trusts – you still control your money
  • It’s more straightforward and easier to understand than many trusts
  • There’s no limit to the value of the business which qualifies
  • BPR-qualifying investments do not use the nil-rate band, so this allowance to reduce your IHT can be used against other assets, such as your home
  • BPR means the business doesn’t have to be sold or broken up when the owner dies
  • For higher rate tax payers, the additional tax benefits of some of the BPR qualifying investments – such as tax-free income – should be appealing.


If you’re already a business owner


You’re well on the way to being able to take advantage of BPR to reduce your IHT liability. 

But BPR should not be taken for granted. The legislation contains a number of exemptions and pitfalls. If BPR is denied or restricted, you risk a 40% IHT charge on death. Make sure you speak to an independent financial adviser in plenty of time so you have a clear understanding of your position.


BPR as part of an estate planning strategy


Investing in relevant BPR-qualifying property can be a very effective way of reducing your taxable estate. It may be possible to achieve a quick reduction in the value of your taxable estate, equivalent to the entire investment amount. It’s a particularly strong choice if:

  • You need your investment to become IHT-exempt quickly
  • You want to give your estate the chance to grow.

 
There are a number of investment options to consider:

  • Buying shares in a qualifying trading business
  • Investing in an AIM portfolio – a fund manager can construct a portfolio or stocks that should both grow in value and mitigate IHT
  • Investing in EIS company or fund – gives you the opportunity to invest in prospects otherwise out of reach as they are unlisted
  • Property development – working with experienced developers, you can acquire land, build houses and sell to the local market
  • Trading companies that facilitate investments in BPR qualifying trades
  • An ISA which invests specifically in AIM-listed companies expected to qualify for BPR – this can offer IHT exemptions as well as traditional ISA benefits of a tax-free income and capital growth
  • Buying forestry – qualifies for forestry relief and generates tax-free income and tax-free capital growth on the value of standing timber
  • Farming – agricultural property qualifies for agricultural property relief (APR). This is applied in priority to BPR.

As with all investments, it is really important to get independent financial advice when considering any options. There are relatively few financial service providers offering clients access to a range of these BPR qualifying investment options for IHT mitigation purposes. We are one of them.


Are there any exemptions?


BPR is not given when the activities consist wholly or mainly in dealing with:

  • Securities, stocks, shares, land and buildings
  • Making or holding investments.

Some exempt businesses are easy to spot – those that only generate investment incomes or operate as a not-for-profit organisation, for example. But some are more complicated. It would seem quite easy to argue that a holiday let, for instance, is a trading business. But that is not necessarily the case and BPR has been refused on holiday lets in the past.

If a business is being sold or wound up, it can fail to meet the qualifying criteria.

There may also be “excepted assets” within a business which will be excluded from the total BPR value including:

  • Any asset that has not been used in the business for two years before the transfer, and will not be required for future use in the business
  • Large surpluses of cash that have not been earmarked for specific future use
  • The value of any ‘investment’ subsidiary within a holding company.


What are the risks associated with BRP?


BPR can be complicated and there are risks and pitfalls. As with all estate planning, it can be very expensive if you get it wrong. Here are a few of the main risks to be aware of:

  • As with all investments, the value of your investment could fall and you may not get back what you put in
  • Investment in unquoted companies or those quoted on AIM can rise or fall more sharply than shares listed on the main market
  • Shares not listed on the main market may be harder to sell
  • It is all too easy to lose business property relief by failing to meet the qualifying conditions at the appropriate time
  • Use of the wrong type of share purchase agreement may cause problems
  • Tax rules may change in the future.


How can we help?


This article gives a brief introduction to business property relief, but BPR can get quite technical and there are considerations we’ve not touched on here. 

If you’ve not already discussed the benefits of relievable property as an inheritance tax (IHT) tool with a financial adviser, you could be missing an opportunity. 

If you are looking for a way to reduce IHT, we are happy to discuss BPR as an investment strategy and help you make the right decisions.

Simply get in touch by calling 0207 633 2222 or email paula@johnlamb.co.uk