These days, a lot of people running a business or company often operate under the assumption that when they die their estates will automatically be entitled to Business Property Relief (BPR) and therefore the value of their business would be exempt from Inheritance Tax (IHT). This is often not the case.
The requirements to succeed in claiming BPR to a person’s estate are quite complicated. It is not simply enough to assume that your business or company will be entitled to BPR which will exempt the value of any shares or the value of the business from IHT.
If you have a business or company that has been incorporated and you have arranged for the business property to be retained or owned outside of your limited company, even though the property itself is being used for the purposes of your business, there is the risk that you will only be able to apply BPR at 50% on the premises, meaning that the remaining 50% of the business premises will be subject to IHT.
The other risk is if you were to own less than 50% of the business/company and still own 100% of the business premises, you may not get BPR at all.
A further pitfall relates to the type of business. For instance, an investment or a dealing business will not qualify. It is a general rule of thumb that BPR is only given to trading businesses. However, if your business owns properties which are residentially or commercially let out, it may not attract BPR.
Also in cases where you may have a business that is mixed (i.e. part of it lets out residential and/or commercial property and then another part is a trading business), if the share of your company that is a trading business is less than 50%, then it may be that BPR will not be available for your whole company. The trading part of your business must be the major or dominant part of your business.
BPR is not available for companies whose main business is in the property rental trade. It is said that the government’s reasoning behind this is that they want to give tax relief to ‘genuine’ business activities rather than letting companies which are felt to be more of an investment nature.
Another pitfall to be highlighted is ‘excepted assets’. Certain types of assets that are excluded from BPR. The more common of these is where the proprietor of a business park’s “spare cash” is surplus to the business requirements in the business. The IHT rules say that if a company holds assets such as cash that is not being used for the company’s trade, then that portion of unused assets will be subject to IHT. Conversely, if the cash sum can be shown to be required for the trade of the business, or as being retained for future trading, then it may be possible to claim BPR.
Do not assume that your business/company qualifies for 100% relief, or even 50% relief, as the BPR tax system is complicated.
IHT planning now can save you and your executors a lot of expense, so obtain appropriate advice sooner rather than later to keep the ball in your hands.
Thara Thangavel | Solicitor
Private Client Department, Kerseys
(Photo of Dog with Ball by Taro)