Business Property Relief (“BPR”) from Inheritance Tax
Broadly, if an individual’s estate is valued over £325,000 when he or she dies, inheritance tax will be payable at 40% on the amount by which that figure is exceeded. However, this is subject to various exemptions and reliefs, some of which are more generally known than others – for example, no tax is due on a transfer (either in the lifetime of the individual or on their death) between spouses or registered civil partners.
BPR is of particular relevance to business owners in the context of inheritance tax. The relief is potentially extremely valuable as it can reduce the value of an individual’s business interests by 100% for inheritance tax purposes, thereby saving tax at 40% of the value of those interests. Typically, this can have a dramatic effect on the amount of tax, if any, ultimately payable.
The word “business” is not specifically defined in the inheritance tax legislation. Instead, the concept of “relevant business property” is used to distinguish between what can qualify for BPR and what cannot. Relevant business property includes a share in a partnership as well as shareholdings which are not quoted on the Stock Market. Assets held personally by an individual that are used by the partnership or company can qualify for relief at 50%.
There are various conditions that have to be satisfied to claim BPR:
- the individual must have owned the relevant business property for at least 2 years before his or her death;
- the relevant business property must not be subject to a binding contract for sale at the time of its transfer; and
- the business must be actively trading and must not be holding substantial investment assets – this may be relevant where a business has built up a substantial cash reserve by retaining its profits over the years (see note below).
Tax efficient wills
To maximise the use of BPR on death, the business owner’s will should be drafted carefully to ensure that it contains a specific gift of the property that will attract the relief. Otherwise there is a risk that some or all of the relief will be wasted if an exemption from tax (such as the spouse exemption) also applies to the estate. Typically, it will be advisable for the business owner’s will to gift the property attracting BPR to a discretionary trust (from which the surviving spouse can benefit, together with other family members) so that the property remains out of the surviving spouse’s estate for inheritance tax purposes on his or her subsequent death. This ensures that BPR is maximised, reducing the potential inheritance tax liability.
Of course, there are many other reasons why making a will, or reviewing an existing will, is advisable. In our experience, people’s expectations on what will happen on the death of an individual who dies without leaving a will are not borne out in reality and the outcome is rarely one which the deceased would have desired. Individuals who are often unprepared and perhaps not suited to the task can find themselves in the position of having to deal with the administration of a complicated and valuable estate. For the business owner in particular, these are issues that need to be properly thought through and planned for.
For further advice, please contact Malcolm Gibbs in the Wealth Management Team at Coffin Mew Solicitors on 023 9236 6045 or by email to firstname.lastname@example.org
BPR will not be available where the business activities consist “wholly or mainly” of dealing in securities, stocks and shares, land and buildings or making or holding of investments. The “wholly or mainly” test is not necessarily easy to apply as problems can arise where there are several sides to a business, one or more of which could fall within the excluded categories of activity. Case law indicates that when considering it, the level of net profit generated by a particular business activity (in comparison to other activities undertaken by the business) should not be regarded as the only or principal test. Rather, the business and its activities should be looked at in the round. This means looking at factors such as the overall context of the business, the value of assets employed in the trading side and the investment side, how the directors and employees spend their time and how the turnover is split between the trading and investment sides, as well as the amount of profit generated by each side.