Business property relief (BPR) is an important relief from inheritance tax (IHT), which will be familiar to many taxpayers and tax advisers. This is probably due to the generosity of the relief, which broadly shelters from IHT the value of certain types of business or business property, at current rates of 100% or 50%.
The relief (IHTA 1984, ss 103-114) reduces the value transferred by a transfer of value of certain types of business or business property. The rate of BPR depends on the type of business or business property. The most common categories in practice are a business or interest in a business, and unquoted shares in a company, both of which can attract BPR at the rate of 100%.
The relief must be claimed, and a number of conditions must be satisfied for the relief to be available (e.g. in relation to the type of business carried on, the length of ownership of the business or business interest, etc.). A consideration of the requirements for an eligible BPR claim is beyond the scope of this article.
BPR in action
BPR is available on lifetime transfers, and to relevant business property included in an individual’s estate on death.
In the case of married couples (or civil partners), if (say) one spouse leaves relevant business property eligible for BPR at 100% to the other spouse on death, this will generally result in the relief being wasted, as the legacy will normally be subject to the spouse exemption for IHT purposes (IHTA 1984, s 18). However, note that the spouse exemption for IHT purposes is subject to restriction if the recipient spouse is not domiciled in the UK.
On the other hand, leaving the relevant business property to a non-exempt recipient(s) (e.g. adult children, or a family discretionary trust) would normally allow a BPR claim to be made.
Example 1 – The first helping of BPR
Mr Edwards died on 30 September 2014, having made no lifetime gifts. His estate on death was as follows:
Family home £625,000
Shares in XYZ Ltd £800,000
Investment properties, bank and building society accounts, portfolio of quoted shares £1,250,000
In his will, Mr Edwards left the shares in XYZ Ltd to a discretionary trust for his UK domiciled widow Doris, his children and grandchildren. XYZ Ltd is a family company, which makes office furniture. He also left investment assets of £325,000 to the trust (i.e. equal to his available nil rate band for 2014/15).
The family home is left to Doris, together with the remaining investments of £925,000 (i.e. £1,250,000 – £325,000).
What is the IHT position in the above example? The discretionary trust receives assets amounting to £1,125,000. The XYZ Ltd shares valued at £800,000 attract BPR at 100%. The investment assets of £325,000 left to the discretionary trust are covered by Mr Edwards’ IHT nil rate band. No IHT liability therefore arises in respect of the legacies to the trust.
The family home (£625,000) and remaining investment assets (£925,000) left to Doris are subject to the spouse exemption for IHT purposes.
Note that Mr Edwards could instead leave all the investment assets to Doris (i.e. rather than leaving £325,000 of such assets to the trustees). Her estate would then be able to claim Mr Edwards’ unused nil rate band on her death (IHTA 1984, ss 8A-8B).
In some cases, it may be possible for BPR to be utilised for a second time in respect of the same business property. This may be particularly useful in family situations.
The following example continues with the fortunes of Doris from Example 1.
Example 2 – A second helping of BPR
Doris has been a director and employee of XYZ Ltd for many years. Following her husband’s death, she has become more keenly involved in the running of the family business.
She buys the shares in XYZ Ltd from the trustees of the discretionary trust for £800,000 (which still equates to the market value of the shares in this example). No capital gains tax (CGT) is payable by the trustees, as there was a tax-free uplift in the value of the shares to £800,000 for CGT purposes on Mr Edwards’ death (but note that Doris will be liable to stamp duty at 0.5% of their acquisition cost (i.e. £4,000)).
The purchase price of the shares was funded out of the investments inherited from her husband, which Doris realised shortly after her husband’s death. The base cost of the investment properties and quoted shares were also uplifted to market value on Mr Edwards’ death, and any CGT liability on their sale by Doris is therefore assumed to be small in this example.
If Doris survives for at least two years following her acquisition of the XYZ Ltd shares, and assuming that BPR at 100% is still available in respect of the shares, the IHT on Doris’s death in respect of the assets inherited from her late husband is limited to the remaining investment assets and the family home. The discretionary trust is liable to IHT (e.g. on ten-year anniversaries and on capital distributions to beneficiaries), but IHT rates for such trusts are generally lower than for individuals (i.e. generally a maximum of 6% for the trust every ten years, as opposed to 20% for chargeable lifetime transfers by individuals, or 40% on death).
In the meantime, the trustees of the discretionary trust may decide to allow Doris to benefit from the trust by making income distributions to her as a beneficiary.
Going, going, gone?
As mentioned at the start of this article, BPR is a generous IHT relief. There is always a danger that BPR may be restricted or withdrawn in the future. Indeed, at the time of writing there has been some speculation in the professional press that the normal two year ownership requirement for BPR purposes may be significantly increased, or that BPR may be subject to the business property needing to be held for a certain number of years before being sold by legatees or beneficiaries. The scope for any ‘doubling up’ of BPR may therefore possibly have only a limited ‘shelf life’ in its present form.
In the above example, what if Doris had been granted an option to purchase the shares in XYZ Ltd from the trust at market value following her husband’s death? HMRC appear to accept that option arrangements do not generally constitute binding ‘contracts for sale’ within IHTA 1984, s 113, and thus should not normally affect entitlement to BPR under that anti-avoidance provision (see HMRC’s Inheritance Tax manual at IHTM25292).
The above article was first published by Tax Insider (February 2015) (www.taxinsider.co.uk).