Avoid Inheritance Burden; Philip Harrison, Partner at Solihull-Based Private Client Law Firm Meridian Private Client LLP Looks at How Some Family-Owned Businesses Can Benefit from One Particular Tax Break
Byline: Philip Harrison
The families behind privatelyowned businesses can benefit from a valuable tax break in the shape of Business Property Relief (BPR).
BPR means that, as long as the business or shares have been owned for two years, full relief from inheritance tax may be obtained when the owner or shareholder passes on.
This relief was first devised to enable private companies and family businesses to survive and prosper through being passed on through the generations, without entrepreneurs and owners having to sell them to pay inheritance tax.
It has been retained despite the fact such succession happens relatively infrequently these days.
Entrepreneurs and owner managers can minimise the IHT payable by their estate through using BPR to the full but there are pitfalls to be avoided and there is planning to be done.
BPR has several advantages over gifts, another traditional method of reducing potential IHT liabilities, although BPR is not necessarily straightforward and professional advice is necessary.
Assets sheltered by BPR can simply be retained until death, although the relief can also be used in conjunction with gifting for more sophisticated planning.
One advantage of BPR in tax planning terms is that the qualification period is relatively short - BPR can be established within two years.
In contrast, where gifts are used to pass wealth on outside the inheritance tax net, the donor has to survive for seven years after the gift is made to stop it being wholly or partly brought back into an estate for IHT.
Another factor is that gifts cannot have strings attached - the donor must not benefit from the asset given away, and all control and influence is lost (at least unless a trust is used).
On the other hand, BPR allows the entrepreneur or shareholder to retain economic ownership and control or influence in the business, effectively until his or her death.
BPR can be claimed on any qualifying business assets that the individual has owned for two years or more.
To qualify for 100 per cent relief, shares must be unquoted, although many companies listed on the Alternative Investment Market (AIM) or PLUS Market companies are eligible.
Controlling interests in fully listed companies qualify for 50 per cent relief. In this article though, I am concentrating on private businesses.
The businesses themselves must primarily be trading and investment firms do not qualify. Mixed trading and investment businesses need to be considered carefully to establish their status, considering factors such as the level of revenue and profit from each activity. If it can be established that the business is primarily trading, the secondary investment business will also qualify for relief, which would not be the case if it were carried on separately.
Even where the business qualifies, assets such as surplus cash balances, which are not needed immediately or in the foreseeable future for business purposes, can restrict the availability of BPR. …