A valuable tax relief for business owners, business property relief can reduce the amount of inheritance tax payable on transfers of relevant property.
‘Relevant’ business property can also signify certain assets or business interests, and such transfers can be made during an individual’s lifetime or after death. If available, the rate of business property relief is either 50 or 100 , depending on the type of property that is being transferred.
How Does Business Property Relief Work?
If a person’s assets are gifted or transferred to another individual within seven years of the original owner’s death, inheritance tax is usually payable on the value exceeding the relevant nil rate band (sometimes referred to as the inheritance tax threshold). Business property relief can reduce the amount payable by up to 100 .
That said, it should not be taken for granted that such reliefs will be available, and we strongly recommend undertaking suitable tax planning with a qualified tax consultant. If you have assumed that BPR will apply, but in the event of your death it does not, an inheritance tax charge of 40 is likely to apply.
Do All Businesses Qualify?
The term business – in this instance – equates to activities ‘carried on in the exercise of a profession of vocation’ but not businesses ‘carried on otherwise than for gain’ (hobby businesses, for example). Eligible businesses are often referred to as ‘qualifying trading companies’.
Generally speaking, shareholdings in all companies are eligible for BPR, with the exception of businesses that trade largely in shares, securities, land, buildings, or the making/holding of investments. Importantly, therefore, this means that businesses dealing in lettings are rarely granted business property relief.
In addition, business property relief is only available after an ownership period of two or more years (see below).
Business Property Relief: Ownership Conditions
As mentioned above, in order to qualify for business property relief, the asset in question must have been owned by the transferor for at least two years prior to the transfer – and the business must have been ‘wholly or mainly’ trading throughout (though the nature of the business itself may have changed during this time).
This rule may be relaxed if any of the following conditions apply:
- If there have been successive transfers within a two-year period.
- If the transferor acquired the property due to another person’s death.
- If the transferred property has replaced additional business property.
- If the property has been transferred to a spouse (in which case the ownership period can be aggregated, regardless of how long the two individuals were married for).
Business Property Relief: Eligible Properties
The 1984 Inheritance Tax Act sets out the conditions for relief for particular businesses or property transfers (whether as part of the deceased’s estate or during a lifetime transfer, and regardless of location).
The categories, along with the relevant rates of relief, include (but are not limited to):
- 100 relief. This applies to holdings of unquoted securities or shares in a company (those that have not been listed on a recognised stock exchange); shares listed on the Alternative Investment Market; and sole trader businesses or shares in a partnership.
- 50 relief. This applies to holdings of quoted shares in a company (those listed on a recognised stock exchange); and land, buildings, machinery or plant owned by the individual and used by an eligible company/partnership under their control.
- In addition, business property relief is also available for loan notes/debentures in a company. To be eligible to claim, the individual in question must have voting rights within the company.
Note that if a binding contract for sale is in place, HMRC may deny the recipient’s right to BPR.
Should Business Property Relief Influence My Estate-Planning Strategy?
Alongside BPR’s most obvious benefit (a significant reduction in the amount of tax the recipient of a business property transfer would need to pay), there are other reasons to consider this relief. For example, if you wish to leave a significant other a sizable inheritance, investing in a company that is eligible for BPR could prove a clever investment move – should the company flourish, the value of your investment could grow over time (rather than stagnating at its current value). Alternatively, if you’re planning to make a transfer in your lifetime, you may wish to speed up the process – the recipient needs to retain ownership of the transferred business property for just two years in order to enjoy 50 -100 relief, rather than waiting the seven years required for a traditional gift or transfer to become exempt from inheritance tax.