Business Property Relief

Posted on: November 13th, 2018

Upon the death of a business owner, how can those left behind alleviate inheritance tax concerns and futureproof the businesses growth opportunities? Lindsay Taylor explores Business Property Relief (BPR) and how it can aid succession planning.

We are proud at Coffin Mew to haven been recognised as the fastest growing law firm on the South Coast. George P. Shultz (American economist, elder statesman and businessman) understood that ‘You don’t get gushers of revenue by raising tax rates. You get it through expansion.’

To encourage business growth and to alleviate inheritance tax concerns on the death of business owners, a tax relief known as Business Property Relief (BPR) was introduced in Chapter 1 of Part V of the Inheritance Tax Act 1984, Lindsay Taylor explains what this means for businesses.

The implementation of BPR was and remains for policy reasons. It is recognised by Parliament that a continuing business is good for the country (and tax revenue!). The main aim of BPR is to reduce the risk of inheritance tax resulting in the breakup of a viable business.

Where the business or property meets the conditions for the relief, BPR reduces the value of the lifetime transfer or gift made on death (known as transfers of value) of relevant business property made by the owner. The resulting reduction in the open market value of the property in the context of inheritance tax will be 100% or 50%.

Relevant Business Property (RBP)

Vital to the operation of BPR is the concept of RBP. To qualify as RBP, the property concerned must:

  • Fall within one of a number of prescribed categories, which also determine the rate of BPR
  • Satisfy a minimum ownership requirement
  • Not be caught by one of the automatic exclusions

Categories of Relevant Business Property and Rates of Relief

For transfers of value occurring on or after 6 April 1996, the table below sets out the types of property that can qualify as RBP and the applicable rate of BPR in each case.

Type of property  Rate of BPR
A business (carried on by a sole trader) 100%
An interest in a business (for example, a partnership share) 100%
Unquoted company shares (which include shares listed on AIM) 100%
Unquoted company securities (for example, debenture stock or loan notes) that either by themselves or when combined with other unquoted shares and securities owned by the transferor gave control of more than 50% of votes on all questions affecting the company as a whole 100%
Quoted company shares or securities (shares or securities listed on a recognised stock exchange) that either by themselves or when combined with other quoted shares and securities owned by the transferor gave control of more than 50% of votes on all questions affecting the company as a whole  50%
Land, buildings, machinery or plant owned by the transferor directly and used wholly or mainly for the purposes of a business carried on by a company that he controlled (provided that the interest in the company also qualified as RBP) 50%
Land, buildings, machinery or plant owned by the transferor directly and used wholly or mainly for the purposes of a business carried on by a partnership in which they were a partner (provided that the partnership interest also qualified as RBP)

50%

Land, buildings, machinery or plant owned by a trust in which the transferor had an interest in possession and used wholly or mainly for the purposes of a business carried on by them (provided that their interest in the business also qualified as RBP)

 50%*

 

*Unless both the trust assets and the transferor’s business were transferred at the same time (usually on death), in which case relief at the rate applicable to a business (100%) may be available 50%*

 

Minimum Ownership Requirement

To qualify as RBP, the property concerned must have been owned by the transfer or throughout the two year period leading up to the transfer. There are some qualifications to this rule, primarily:-
Transfers between spouses on death

  • Quick succession where the property was transferred twice or more during the two year period (at least once on death)
  • Replacement property provided the substituted property is capable of satisfying the RBP conditions save for the two year requirement
  • Ownership by Trustees

Prohibited Activities

The relief can be lost if the business fails to satisfy certain tests:

  •  It must have been carried on for a gain
  •  It must not wholly or mainly consist of the following: Dealing in securities, stocks or shares, Dealing in land or buildings, Making or holding investments

BPR is a complex but vital tax saving tool, the nuances of which are beyond the scope of this article. If you own a business, you should ensure that it qualifies for the relief regardless of its future growth.

‘If you work just for money, you’ll never make it, but if you love what you’re doing and you always put the customer first, success will be yours.’ – Ray Kroc.

 

If you’d like further advice on Business Property Relief (BPR), Inheritance Tax or keeping your Will up to date get in touch with our Will, Trusts & Probate team here.