There are a variety of estate planning mechanisms which allow for inheritance tax (IHT) to be mitigated or reduced entirely and one which is sometimes overlooked when drafting a Will is Business Property Relief (BPR). If BPR is available, it can be generous in its application reducing the IHT by either 50% or 100%, depending on the asset involved. Employing BPR strategies and careful drafting in your Will can allow for significant tax savings. Conversely, if the business is not considered as part of the drafting process, you may end up not maximising the relief.
As with any IHT relief, certain conditions need to be met in order to qualify for it. These are broadly set out under 3 headings but there are usually exceptions to these, which is outside the scope of this article:
- Minimum ownership requirement;
- Fall within a prescribed list of business property; and
- Not fall within the automatic exclusion
1. Minimum Ownership
The asset in question must have been owned for a period of two years immediately preceding the transfer. The transfer in the context of a Will is the date of the death of the owner. Where business property has been replaced, the earlier and replacement property must have been owned for two years within the five-year period prior to the date of transfer.
2. Categories of Business Property
The rate of BPR which is available centres around the type of property. For example, a business carried on by a sole trader, a partnership share, holding unquoted company shares (including those listed on AIM) can attract 100% relief, whereas quoted company shares giving the owner more than 50% of the votes will qualify for 50% BPR.
3. Automatic Exclusions
As well as being a business which is carried on for gain, it must be one which does not wholly or mainly:
- deal in securities, stocks or shares;
- deal in land or buildings; or
- make or hold investments.
Cross Option agreement
These are business documents drafted to deal with the death of a partner or shareholder to ensure it continues to trade and does not automatically dissolved as a result of death and so long as these are drafted carefully, BPR can be preserved. This ought to be coupled with suitable cover under life assurance being in place.
If the clause is drafted obliging the survivors to purchase the interest or the personal representatives of the deceased’s estate being bound to sell to the survivors, then BPR would be unavailable.
As well the loss of BPR should there be a shift in the business model from wholly or mainly trading to one within the automatic exclusions, there are other pitfalls to be aware of:
- Unless owned by a trust and run by a beneficiary of that trust, BPR is not available for land/buildings, machinery or plant used wholly or mainly by a sole trader.
- Loans made by partners do not attract BPR.
- Whilst 100% BPR is available to for an interest in a partnership, only 50% relief is available for assets loaned for partnership use.
- A director’s loan account standing to credit falls outside of BPR assets unless this was converted to share capital before the transfer or death.
- A shareholder, with control over the company, who owns property used by the company will only be able to claim 50% BPR.