Business Property Relief Background
Business Property Relief (BPR) is a long-established relief that has been a feature of the tax system since 1976. It was introduced as there was no relief for the transfer of business property to the next generation so the government were lobbied to change this. The government want to incentivise certain behaviours from its citizens and helping ensure that family businesses are not broken up is part of this.
The rate of relief from Inheritance Tax (IHT) has varied over the years but since 1992 it’s settled at either 50% or 100% of the market value of the business property still within the deceased’s estate. The rate of relief the property attracts depends upon the nature of the property. Straightforward in concept, however, there are numerous traps many business owners are unaware of; they are also unaware of what they need to do to get out of them so as not to leave any nasty surprises for their children.
Business Property Relief Conditions
The basic conditions for Business Property Relief is that there has been a transfer out of your estate of relevant business property. Business property is broadly a business, an interest in a business or assets used in the business.
Simple enough, however, not all businesses qualify as businesses for BPR. Relief is not available for businesses that consist of what would primarily be regarded as investment activities, such as holding land or securities. There exists a large body of case law about what kind of businesses do or do not qualify for BPR, although, as HMRC always say, each case is unique and will turn on its own facts.
In addition, you need to have held the business property for two years before the date of transfer. There are further conditions which must be fulfilled when the property is transferred prior to the date of passing.
Business Property Relief Pitfalls
It can be easy for a trading business to stray into the realm of being an investment business. As a business acquires value over time you may buy land, property or investments with the profits. After many successful years, property held can comprise a substantial proportion of the assets. If the properties aren’t used in the business’ trading activities, they would not form part of the relevant business assets and so BPR could be potentially denied.
Large amounts of cash accrued in the company’s bank account could also be denied on the basis that the cash is not required for the company to trade. It would be important to demonstrate that a large cash balance was required for the business in some way, such as the business was going to invest in a substantial piece of plant.
There are further pitfalls when you give away business property and the recipient then sells it on. In essence, a condition of BPR is that the property is kept within similar ownership. If the property is sold on prior to your passing the gift is no longer of relevant business property, but for example, the cash the recipient received for it. The business property would still be classed as relevant if the proceeds were used to purchase further business property.
Other Considerations for Business Property Relief
BPR interacts with other IHT reliefs, the primary one being Agricultural Property Relief (APR). For example, in the case of land, APR is given off of its agricultural value. The land may be worth more than this and so only attracts partial APR. If the land has been used in a business the residual amount may attract BPR. This can also apply in the reverse situation.
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Business Property Relief Rates and Conditions
A business or an interest in a business
A controlling shareholding in an unquoted company
A minority shareholding of shares in an unquoted company
A controlling shareholding in a quoted company
Land, buildings, machinery or plant used in a business carried on by a company controlled by the transferor or by a partnership of which the owner is partner
Land, buildings, machinery or plant in which the transferor was beneficially entitled to an interest in possession and which is used in which business
100% transferred with the business
Relief is not available:
- Where the business consists of dealing in securities, stocks or shares, land or buildings, or making or holding investments
- Where the property transferred is subject to a binding contract for sale
- In respect of shares in a company in liquidation
- In respect of assets not used wholly or mainly for business purposes
There exists detailed rules and a substantial body of case law surrounding these exclusions.