As a business owner or investor, you might well be aware of Business Property Relief and how this most valuable of tax reliefs could remove the full value of a business from a charge to Inheritance Tax on lifetime gifts or on death.
However, be careful not to automatically assume that you will qualify for part or all of the relief by overlooking some of the small print. With Inheritance Tax currently running at 40%, cutting corners or not doing your homework properly could prove a very expensive mistake.
Most leading firms of accountants have tax specialists who will be able to advise on what you do or do not qualify for, but here are a few of the main pitfalls to look out for :
1. Is the business an active trading entity or more of a passive investment vehicle ?
Broadly speaking, most businesses would qualify provided they are actively carrying out a trade. Those which do not fall into this category are those engaged mainly in dealing in stocks or shares, land or buildings or in making or holding investments. By “mainly”, we are talking over 50% and it may be that you will need professional advice on what constitutes 50%. Certain exclusions also apply where a business is subject to a contract for sale or is in the process of being wound up.
2. Is any physical property owned by the business also eligible for BPR ?
Normally yes but if the business owns a property which is not used for the purpose of the business, this will be classed as an excepted asset and it will not qualify for business relief. For instance, if it is used wholly or mainly for the personal benefit of the transferor or a connected person such as the spouse, child or other relative, it will not be eligible for BPR.
In a situation where part of an excepted asset is used exclusively for business purposes, this part is regarded by HMRC as a separate asset and will be taken into account when determining the value of the relevant business property.
3. Implications for Directors, Partners and Sole Traders
For the purposes of BPR, HM Revenue & Customs defines a business property as a “ property consisting of a business or interest in a business”. This includes property such as a sole trader’s business, a partner’s share in a partnership and a director’s share in a limited company.
All those who fall into this category should be very careful to note that the relief is given on the business as a whole or a share in it. The transfer of an individual asset from the business to a beneficiary will not count. Another asset that doesn’t count is one which is owned by the transferor but used by someone else in their business.
What’s at stake here
Making sure that you have all your ducks in a row where BPR is concerned could make all the difference between an orderly transfer of assets to your heirs and a highly stressful situation in which you either have to sell off family assets or raise significant funds through borrowing.
By way of example, an individual with non-business assets (family home, savings etc.) of an amount equal to the ‘nil rate band’ (currently £325,000 or for a married couple or civil partnership, a joint value of £650,000) and a business valued at £1,000,000 would pay no Inheritance Tax on death if the business qualifies for full BPR.
If, on the other hand, the business does not qualify for any BPR, the IHT due would be £400,000.