Business Property Relief

Business Property Relief is a valuable tax relief available to major shareholders and business owners of trading companies at the point of succession planning or death.

Many company directors believe they will be exempt from Inheritance Tax.

However, as businesses grow and expand, the simple trading business model, morphs and changes for valid commercial or personal reasons.   At these critical points, it is important to be aware of the implications for Inheritance Tax as your family could discover to its huge cost what you didn’t realise whilst you were alive.

There are almost always ways to ensure that your structure can work for your business whilst you are alive as well as for those you leave behind.

As ever, getting the right advice early on can avoid shocks when they are too late to remedy.

How we’ve helped:

• We have helped a family business in the property development sector consider the benefits of using family monies to finance growth rather than rely on external debt.
• We have improved the availability of BPR for a wealthy family in the services office sector by considering asset ownership structures and the inheritance tax efficiency of the alternatives.
• We have advised on the impact of ownership of non-trading assets within the trading structure of a professional practice and provided solutions to identified tax inefficiencies in order to maximise availability of BPR.

Frequently Asked Questions

Can businesses with substantial cash and investments still qualify for BPR?

If the business is holding substantial cash, there is a risk that BPR can be restricted or denied altogether. However, steps can be taken to improve the BPR position. These could include reinvesting the cash in the qualifying business or making distributions to its shareholders.

Holding business investments does not necessarily mean BPR will be denied or restricted, provided the investment activities do not account for more than 50% of the business activities overall. However, if the business is holding or only making investments, then it will not be eligible for BPR.

How can a business with a combination of trading and investment activities ensure full qualification for BPR?

If a business has mixed business activities, such as 70% trading activities and 30% investment activities, it cannot automatically be assumed that only 70% of the business is eligible for BPR and the remaining 30% will be denied BPR. If structured correctly, the business as a whole (including the 30%) could qualify for BPR provided the investment assets do not fall into the definition of an ‘excepted asset’. Excepted assets are those which are neither used in the business nor earmarked for future business use. An example of an excepted asset could be a property owned by the business but used personally by one of the directors as their home.

Depending on the business structure, there may be scenarios where the investment activities are integral to the entire business. In that instance, the entire business would be eligible for BPR. Therefore, it is essential to scrutinise the business to determine its eligibility for BPR if any investment activities are present. If the business does not qualify for relief, there might be actions that could be recommended to enhance its eligibility or reorganise its structure to ensure that the trading component qualifies for BPR.

If the business has been trading for less than two years, will the business qualify for Business Property Relief BPR?

The eligibility period for BPR is determined based on a two-year ownership test rather than the duration of trading. This means that BPR may apply even if an individual holds qualifying shares for

over two years while the business has been trading for less than that period. It is crucial to emphasise that the business must be trading actively or satisfy the relevant business property definition during the relevant transfer or chargeable event.

Furthermore, the legislation outlines specific scenarios in which BPR may be accessible with an ownership period of less than two years. These circumstances include the replacement of assets eligible for BPR with new qualifying property, inheritance by a surviving spouse, or two successive transfers occurring within a short timeframe.

I think my business qualifies for BPR, but HMRC disagrees. What steps should I take to address this disagreement?

The first step would be to review HMRCs response to understand the specific reasons for their disagreement. Once their concerns have been understood, a counter argument should be presented if appropriate. The counter argument should be supported with contemporaneous evidence if available. It may also be worthwhile consulting with tax professional at this point if you have not done so already, to help you prepare and present a case to HMRC as robustly as possible.

If you are still dissatisfied with HMRCs final decision, you may wish to request a statutory review and/or make an appeal to an independent tax tribunal. The latter can be costly and, therefore, a statutory review may be preferrable in the first instance.

Can an overseas registered business qualify for BPR?

Yes, provided the individual or trust holding the interest in the business, and the overseas business itself, meet the conditions for BPR to apply.

Double Tax Treaties may need to be considered between the UK and the country where the overseas business is registered as this could impact the ultimate tax treatment of the asset and its eligibility for BPR.

A discretionary trust owns shares which did not meet the conditions for BPR. A ten-year anniversary charge has arisen, but the trustees do not have any cash to settle the IHT liability. What are their options to settle the debt?

There are a several options available for the trustees to generate adequate funds to settle the IHT liability.

• Sell shares – the trustees could sell sufficient shares to cover the IHT liability. Selling shares may also trigger other taxes such capital gains tax and therefore this will also need to be taken into consideration to ensure the sale proceeds are sufficient to cover all the taxes due, not only the IHT liability.
• Issue a dividend – Another approach would be for the company to issue a dividend payment to its shareholders. This could then be used to settle the debt. Again, there may also be other taxes to consider such as income tax and therefore the dividend declared must be sufficient to cover all tax liabilities.
• Loan – The trustees may wish to obtain a loan or third-party bank debt to settle the liability. The repayment terms should be agreed at the outset to avoid any potential conflicts in the future.
• Instalment option – Subject to certain conditions being met, the IHT liability can be paid under an instalment option. In many cases, the outstanding liability will incur interest but there are limited circumstances in which this can be interest free.

Do Furnished Holiday Lets (FHLs) qualify for BPR?

In principle, FHLs have the potential to qualify for BPR; however, achieving BPR eligibility for holiday lets, particularly FHLs, has proven to be challenging in practice.

Case law developments highlight two pivotal factors that influence BPR qualification: the extent of services provided and the owner's engagement in holidaymakers' activities. On one extreme, where owners merely engage in long-term property rentals, characterised as a passive investment, BPR qualification is unlikely. Conversely, running a hotel, representing an active business, qualifies for BPR. FHLs typically occupy a middle ground, requiring a demonstration that the level of services offered is comparable to those of a hotel to secure BPR.

Notably, it is crucial to recognise that the definition of an FHL for income tax and capital gains tax does not extend to inheritance tax considerations.

If a donor gifts shares qualifying for BPR to another individual and passes away within seven years, what is the BPR position on death? Does it change if the gift was made to a trust?

In the event that a donor does not survive seven years after making a gift to an individual, the gift becomes chargeable and the BPR position on death comes into play. Provided the donor met the conditions for BPR at the time of the gift, and the donee retains the relevant business throughout the ownership period or replaces it with other qualifying business property, BPR is not clawed back upon the donor's death. However, if the property no longer qualifies as relevant business property, such as through a sale, BPR may be clawed back upon death.

In the case of a gift to a trust, the same principles mentioned above apply to trusts.

The donor's nil rate band allowance on death could be impacted, depending on whether the gift was made to an individual or a trust and whether or not BPR is clawed back. Understanding the seven-year rule for gifted shares is complex particularly where assets qualify for BPR.