What is Business Property Relief?

Different priorities can make it challenging for business owners to commit to succession planning but taking advice at an early stage can improve the chances of securing Business Property Relief and avoid the need for a profitable business to be sold or broken up to meet a future inheritance tax charge.

There is often a wish to involve children or family members in the business in order that they might receive the benefit the current owners have enjoyed. The transfer of value between generations, whether by lifetime gift or on death, will be subject to the inheritance tax regime. 

Business Property Relief (BPR) is a relief from inheritance tax (IHT). The effect of BPR is to reduce the transfer of value by either 50% or 100% for the purposes of calculating the inheritance tax due. Assets that have the potential to qualify for BPR are referred to as Relevant Business Property.

The actual charge to tax may not be for many years after the gift is made or the Will is signed. The availability of the relief is assessed on the incidence to tax. Careful planning is required to ensure that the relief is available at the relevant time.

What qualifies as Relevant Business Property (RBP)?

To qualify as Relevant Business Property, the property must:

1. Fall within one of a number of prescribed categories of property (which also determine the rate of BPR);
2. Satisfy the minimum ownership requirement; and
3. Not be caught by one of the automatic exclusions.

Prescribed categories of property

RBP qualifying for 100% BPR includes, but is not limited to:

1. A business (carried on by a sole trader);
2. An interest in a business (for example, a partnership share).
3. Unquoted company shares (which include shares listed on AIM).

RBP qualifying for 50% BPR includes land, buildings, machinery or plant;

1. Owned by the transferor directly (or the trustees of a trust in which the transferor had an interest in possession); and
2. Used wholly or mainly for the purposes of a business carried on by either:
   • a company that the transferor controlled (provided that his interest in the company also qualified as RBP).
   • a partnership in which the transferor was a partner (provided that his partnership interest also qualified as RBP).

Minimum Ownership Requirement

An essential element is the period of ownership prior to transfer. The asset must have been owned for a minimum of 2 years. Where there has been a prior transfer between spouses, the combined period of ownership applies. Particular care needs to be taken in relation to lifetime gifts where the ownership at the date of death, as opposed to the date of the gift, becomes relevant. 

Automatic Exclusions

To qualify as RBP, the underlying business must satisfy the following tests:

1. It must be carried on for a gain (it can include a business carried on in the exercise of a profession or vocation and there are exemptions for holding companies)
2. It must not have consisted wholly or mainly of the following prohibited activities:
   • Dealing in securities, stocks or shares;
   • Dealing in land or buildings; or
   • Making or holding investments

In deciding whether a business consisted “wholly or mainly” of one or more of these prohibited activities, the business will be looked at in the round, taking into account all of its activities both at the date of the transfer and over a reasonable period prior, to see if one or more prohibited activities predominate.

To discuss your options please contact Sam Thornton, Associate Solicitor of Wills & Estates on 01905 730481 or sthornton@thursfields.co.uk