Business property relief (BPR) for inheritance tax (IHT) purposes is perhaps most commonly claimed in respect of an individual’s owner-managed company. The rate of BPR for the individual’s shares in an unquoted trading company is 100% in most cases. The same generally applies to a business, or an interest in it (i.e. for sole traders and partnerships).
Gifts in the correct order
Furthermore, BPR at the lower rate of 50% applies to certain categories of property (IHTA 1984, s 104(1)(b)), including a transfer of land and buildings used in the business of a company controlled by the transferor (or by a partnership of which he was then a member). ‘Control’ is defined broadly in terms of the exercise of a majority of voting power on all matters affecting the company as a whole (s 269(1)).
In the case of (say) land and buildings used by an unquoted trading company, it is important to note the requirement that the company must be controlled by the transferor. For example, a controlling shareholder of the company who owns the business premises may wish to make gifts of shares and the premises at different times. A gift of the shares before the premises can result in BPR at 50% being lost on a subsequent gift of the premises.
Example 1 – Gifts in the ‘wrong’ order
Adam owned 75 shares (i.e. 75% of the shares and voting rights) in Acme Widgets Ltd. His son Zac owns the other 25 shares (25%). The company traded from premises that Adam owned personally.
Adam decided to retire and let Zac take over the business. Adam gifted 65 shares to Zac on 31 December 2014, and retained the other 10% of the shares.
On 6 April 2015, Adam created a family discretionary trust, and decided to gift the business premises to the trustees.
Adam was expecting to be able to claim BPR at 50% on the chargeable transfer of the business premises into trust. However, he was disappointed to discover that no BPR was available, as he did not control Acme Widgets Ltd immediately before the transfer.
In Example 1, unfortunately Adam’s gifts were made in the wrong order. Had he gifted the business premises to the trustees before his gift of shares to Zac, BPR at 50% would have been available on the gift of the premises (nb the gift of shares to Zac was a potentially exempt transfer (PET), so the availability of BPR on the gift would not need to be tested if Adam survives at least seven years from gifting the shares).
Is it a problem?
However, making gifts in the above order is not necessarily a problem, depending on the circumstances.
For example, in determining whether a person is deemed to control the company, any shares that are related property are taken into account (s 269(2)). ‘Related property’ includes property comprised in the estate of a spouse (or civil partner) (s 161(1)).
Example 2 – What’s mine is yours
The facts are as in Example 1, except that Adam originally held 51 shares (51%) and his wife Eve held the other 49 shares. Adam gifted 41 shares to Zac, and retained the other 10% as before.
Adam’s subsequent gift of the business premises is eligible for BPR at 50%, as Adam (through his 10% and his wife Eve’s 49% holdings) would be deemed to control the company immediately before the property is gifted.
The loss of BPR at 50% due to making gifts in the wrong order is not necessarily a disaster for IHT purposes if the qualifying asset was gifted to another individual, as the gift is a PET which becomes exempt after seven years. Consideration could be given to taking out insurance against the risk of the transferor’s death within that period.
The above article was first published by Tax Insider (November 2015) (www.taxinsider.co.uk).