Inheritance tax planning for business owners

It was recently reported that the parliamentary National Audit Office (NAO) is launching an investigation into the misuse of tax reliefs. In particular, it has been noted that the total value of agricultural property relief and business property relief (BPR) from inheritance tax (IHT) has almost doubled in five years. Given that the IHT threshold has been frozen at £325,000 for individuals and £650,000 for couples it comes as no surprise that many people have looked at a number of ways to mitigate IHT.

BPR applies to ‘relevant business property’, and acts to reduce the value of a property by up to 100% for inheritance tax purposes. Therefore BPR may allow relevant business property to be passed free of IHT, either during lifetime planning or on death under a tax efficient will. There are a number of requirements that must be met before BPR can apply, and in light of the NAO investigation specialist tax advice should be taken to ensure all the requirements are met.

What are the requirements?

To be entitled to BPR the asset must:

  • Fall within the description of ‘relevant business property’;
  • Satisfy the minimum period of ownership (which as a general rule is two years); and
  • Not be subject to a binding contract for sale.

Business activities.

There is no BPR if the business is “wholly or mainly” dealing in securities, stocks or shares, land or buildings or making or holding investments.

A business which only generates investment income will not attract BPR, so this excludes:

  • A residential or commercial property letting business;
  • A property dealing business; and
  • A serviced office business.

There are a number of business activities which are borderline; whether they qualify for BPR depends on the nature of services provided. Typically, these include:

  • Holiday businesses;
  • Property management;
  • Property development (if there is also substantial letting and dealing);
  • Mixed estates of farming and letting; and
  • Caravan parks (where there is letting, holidays and caravan sales).

Business owners cannot assume that their business will qualify for 100% BPR. You should therefore take sound advice.

At Rubric, we work closely with farmers and business owners to ensure that all available tax reliefs are captured either by lifetime gifting or through using tax efficient wills. Where there is some doubt around whether BPR can be claimed, we can use our expertise to either move the asset out of the estate or to help strengthen the claim for BPR.

The content of this article is intended as general information only and does not constitute legal advice.