Understanding business property relief for inheritance tax purposes

One of the best shelters from inheritance tax is business property relief (BPR), which enables a taxpayer’s business assets to be exempted from the 40% inheritance tax rate.

If you are a business owner or a private company shareholder and are wondering whether your business assets will attract inheritance tax (IHT), here are some of the conditions that need to be met for the assets to qualify for BPR. This will help you to understand whether the relief applies and whether any forward planning arrangements should be put in place.

Here are 7 conditions that need to be satisfied for assets to qualify for BPR:

• Only certain businesses will qualify for BPR; property investment companies, those dealing in stocks and shares or investments will not be eligible. If you own property through a limited company the shares held in that company will not usually qualify unless the company trades from the property or other qualifying business undertaken by the company is of a substantial size;
• BPR is a relief for business assets and unquoted company shares, or those listed on certain stock exchanges, e.g. AIM;
• Assets must have been held for two years or more before they qualify for BPR;
• In situations where a business is involved in multiple business areas, provided the majority of activity is in a qualifying trade, the company’s shares may be eligible for BPR;
• Where assets were acquired specifically in order to qualify for BPR, or if they were not in significant use in the two years prior to a claim, they may be classified as ‘excepted assets’ and excluded. For example, if an asset was not adequately used for the purpose of the business for two years prior to transfer, it may be ‘excepted’. This would mean the BPR claim would exclude the value of that asset in question, which may or may not be significant;
• Cash sheltered within an unquoted company would be classified as an excepted asset, whereas holding surplus cash which is working capital does not impinge on the availability of BPR;
• Any loans owed to shareholders by a company that qualifies for BPR do not themselves qualify for BPR;
• Where a binding contract is in place – a buy and sell agreement prior to a shareholder’s death, BPR is automatically denied. This can be overcome if the agreements relating to the passing on of a deceased’s interests takes into account an option to purchase at a particular price.

To discuss inheritance tax planning in more detail and to understand whether your estate assets qualify for BPR, please contact us directly.