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Using Business Relief for Inheritance Tax Planning

Tax Planning

Using business relief for inheritance tax (IHT) planning is a tried and tested way to reduce your estate’s potential IHT. We frequently advise our clients on BPR as part of our tax planning service. The Office of Budget Responsibility has confirmed that In the three months to June 2022, receipts reached £1.8bn which was £300m more than the same period in 2021.

How does business relief work?

When determining how much inheritance tax must be paid, your executors will consider the assets that can qualify for business relief. For inheritance tax purposes, any ownership or share in a business is considered part of the estate.

What Assets qualify for business relief?

You must have owned the company or its assets for at least two years before your death to be eligible for BPR. Therefore, your estate won’t qualify for the exemption if you pass away within two years of ownership. The only situation where this rule is not applicable is if you inherit the item from your spouse, who also owned the asset for less than two years.

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What types of businesses can qualify for BPR?

Not every investment or business interest will qualify for BPR, but relief will typically be available for:

  • An interest in a trading business.
  • Shares in an unlisted qualifying company can include a minority holding.
  • Shares held in qualifying companies are listed on the Alternative investment Market (AIM) of the London Stock Exchange (LSE).

Investors can now hold BPR-qualifying shares within a tax-efficient ISA wrapper thanks to the UK Government’s decision in 2013 to permit the holding of AIM-listed shares within Individual Savings Accounts (ISAs).

Do sole traders get BPR?

Since 6 April 1996, sole proprietors who are transferring their business as a whole to another are eligible for 100% BPR. However, if sole proprietors transfer real estate, buildings, or equipment utilised principally for commercial activities, they are not eligible for any BPR.

Business relief qualifying investments?

You can get 100% Business Property Relief if you own:

  • a trading business or an interest in a business
  • ownership of shares in an unlisted company

 

You can get 50% Business Relief on:

  • shares that control 50% or more of the voting rights in a listed company
  • Machinery, buildings or land that is owned by the deceased and used in a business they were a partner in or controlled land, buildings or machinery used in the business and held in a trust that it has the right to benefit from

 

You are only eligible for relief if the dead owned the company or asset for at least two years before passing away.

Which assets don’t qualify for Business Relief?

Unfortunately, it’s not possible to claim business relief if the company:

  • primarily deals in shares, securities, land or buildings.
  • Is a holding company or makes investments.
  • It is a not-for-profit organisation
  • is being sold. However, if the sale is to a company that will continue running the business & the estate will be paid in shares of that company
  • is being wound up unless this is a process that will allow the business of the company to carry on

 

Unfortunately, you can’t claim Business Relief on an asset if it:

  • also qualifies for Agricultural-Property-Relief (APR)
  • was not primarily used mainly for business in the two years before it was either passed on as an outright gift or as part of the will
  • isn’t needed for future use in the business

 

However, if part of an asset is used for business purposes, that part could qualify for Business Property Relief.

What is inheritance tax?

The deceased person’s estate, which includes all of their property, possessions, and money, is subject to inheritance tax (IHT). The inheritance tax rate in the UK is 40% over and above any allowances. Only the portion of your estate above the allowances will be subject to this tax charge. 

The (RNRB) residence-nil-rate band allowance is an additional sum that can be added to the Nil Rate band to calculate any tax liability. It is applied before applicable transferable nil rate bands (TNRB), and the nil rate band (NRB) are in place at the time of the death. However, not everyone will be entitled to the RNRB.

Your executors will also need to consider any gifts that have been made. The size and type of gift are important as they may or may not affect the amount of inheritance tax your estate might have to pay.

How can you use business relief for inheritance tax?

Holding assets for more than two years is an effective way of reducing your estate potential tax. However, ensuring the assets continue to be eligible to business relief is vital. Any changes to the BPR status of the asset could render the tax planning ineffective.

This can be complicated, especially if you own BPR-qualifying shares on the AIM market.

Summary

Tax planning using BPR can be complicated, and we always recommend seeking professional independent financial advice.

If you want to discuss your situation in more depth, please get in touch with us.

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