This week’s post aims to give readers a refresher on Business Property Relief (BPR). It should be noticed that BPR is a large and complex area of tax, so what follows is only a brief overview of the area.
BPR is a relief from Inheritance Tax (IHT) that transfers of certain qualifying business assets may attract. The relief may apply to transfers on death and also transfers in lifetime. It can be quite a generous relief, with business assets attracting BPR at a rate of 50% or 100%, so potentially reducing their IHT liability on the business to nil.
Not all businesses will qualify for BPR. There are three main requirements that have to be met.
1. The business must be a ‘qualifying business’.
Broadly, the business must be a trading business carried on for gain. Not all trading businesses will qualify though as certain activities are not ‘qualifying businesses.’ If the business consists wholly or mainly of dealing in securities, stocks, or shares, dealing in land or buildings, or making or holding investments then it will not qualify (section 105(3)-(4) Inheritance Tax Act 1984).
This is bad news for landlords, as a buy-to-let business would be classed as an investment business and would not attract any BPR.
2. The business property must be ‘relevant business property’.
The amount of BPR available will depend on the type of relevant business property. A business, interest in a business, unquoted company shares, and unquoted company securities which gave the transferor control of the company immediately before the transfer will all qualify for BPR at 100%.
Quoted company shares or securities which gave the transferor control of the company will qualify for BPR at 50%.
Land, buildings, machinery or plant used wholly or mainly for the purposes of the company will qualify for BPR at 50%. This is the case whether the assets were owned by the transferor directly or were held in a trust that they had an interest in possession in, as long as the transferor’s interest in the business was itself relevant business property.
3. The minimum ownership condition must be fulfilled.
The business property must have been owned by the transferor for 2 years immediately prior to the transfer (section 106 IHTA 1984). This ownership period is transferrable between spouses and civil partners on death, so that a surviving spouse who inherits a business will be treated as though they had owned it from the date their deceased spouse had first acquired it.
So as not to deter business owners from investing in their own business the ownership period requirement is relaxed for replacement property. It may be that a business owner purchases an asset that would be relevant business property if it was held for 2 years. As long as the new asset replaces relevant business property, and the old and replacement property were held for a combined period of 2 years falling within the 5 years immediately before the transfer the replacement asset will be relevant business property (section 107 IHTA 1984).
Look out for binding contracts for sale. A business will not qualify for BPR if at the time of the transfer it is subject to a binding contract for sale. Unfortunately, many an estate is caught out by this due to the way the company’s articles of association or shareholders agreement were drafted. If the shareholders or partners enter into an agreement to purchase a deceased shareholder or partner’s interest in the business on death then BPR will not be available if the agreement binds the personal representatives of the estate. If the personal representatives are not obliged to sell the interest to the surviving shareholders then BPR won’t be lost, so it is perfectly fine for business owners to enter into ‘cross-option agreements’ with each other.
For more information on BPR and making provision for businesses contact your local Society Member for advice.