As we find ourselves in the hands of  a new Labour government, speculation is certainly rife as to their plans regarding Inheritance Tax, Capital Gains Tax, business property relief and more.

Whilst we wait with eager anticipation for the Autumn Statement, it may be useful to re-visit exactly what the current situation is with Business Property Relief and how it may be relevant to many.

Introduced by the Finance Act of 1976, it’s initial aim was to prevent unlisted companies (family businesses and the like) from having to broken up after the death of the owner in order to pay inheritance tax.  Successive governments have widened the type of business that any individual can own shares in whilst benefiting from the relief when transferring them on.

For deaths (and transfers) made on or after 6 April 1996, the type of property which qualify as relevant business property are as follows;

Property qualifying as ‘relevant business property’

• Property consisting of a business interest or shares in a business (100% relief)
• Control holdings of unquoted securities in a company (100% relief)
• Unquoted shares in a company (100% relief)
• Control holdings of quoted shares in a company (50% relief)
• Land, buildings, machinery or plant used by a company controlled by the transferor or by a partnership of which the transferor was a party to (50% relief)
• Settled land, buildings, machinery or plant in which the transferor had an interest in possession and used in their business (lifetime transfers only: 50% relief

What is defined as a ‘business’?

This is determined as “a trade or profession carried on for gain”.

The period of ownership rule

Further rules apply and the qualifying business property must have owned for a minimum 2 year period. However, where the transferor became entitled to the property on the death of another person, they are treated as having owned it from the date of the other persons death.

In addition, where the deceased/transferor became entitled to property on the death of their spouse or civil partner, they inherit the ownership period of the spouse or civil partner.

Businesses which do not qualify for the relief

Unfortunately, business property relief is no available where the business carried on by the company consists wholly or mainly of;

• Dealing in securities, stocks and shares
• Dealing in land or buildings
• Making or holding of investments

Generally speaking, property landlords will not qualify for business relief. Other businesses such as caravan sites, furnished lettings, furnished holiday lettings have appeared to be problematic for HMRC with interesting case law in this area.

Claiming the relief

This involves retaining the business assets in the estate valuation as part of the probate process and calculating and applying for this and other exemptions.

Using a Business Property Relief Trust in a Will

Transferring qualifying business property into a discretionary will trust upon death is free of IHT and the transfer into trust doesn’t use any of the deceased’s nil rate band meaning that it transfers and is available to the survivors estate.

Whilst holding assets within a discretionary trust can see negative tax consequences apply when exceeding the nil rate band values, business relief reduces the value of the business property for the purpose of the ten yearly periodic charge calculation. There for if the only assets held in trust at the ten year anniversary are assets which quality for 100% business relief, no periodic charges will apply. Similarly, no exit charges will apply if business relief continues to apply to the asset being transferred out of the trust.

Another benefit may be that by transferring assets into the discretionary will trust, the value held in trust is not aggregated to the surviving spouse or partner for the purpose of the application of the Residence Nil Rate Band (RNRB). The RNRB begins to be lost (thanks to tapering of the allowance) if the survivors estate is above £2m and the value of any business asset is included in the estate valuation for this purpose. Therefore passing qualifying business property into the trust instead can bring substantial IHT benefits.

Planning for business owners call include Wills, Trusts and Lasting Powers of Attorney. If you have an client requirements you would like to chat through, call on 01522 500823.

Source: IPW

This article is for guidance only and is based on our interpretation of current legislation. It does not constitute as financial, legal or tax advice and professional advice should always be sought regarding your own personal circumstance.