2 December 2012

Inheritance Tax Strategy 6 - Use Your "Business Property Relief"

Business Property Relief is usually abbreviated to “BPR”.

1.           The basic principles are:

              a.           Sole traders get 100% BPR on their business and its assets. (100% relief means no tax to pay at all, whether on a lifetime gift or at death.)

              b.           Partners get 100% BPR on their share of the business. (Even members of Limited Liability Partnerships get this relief.)

              c.           All shareholdings in unquoted companies get 100% BPR. Shares which are traded on the Alternative Investment Market are unquoted for this purpose, so you’re still OK to claim BPR on them.

              d.           Partners get 50% BPR on assets owned by them personally but used by the partnership. (50% BPR, of course, means you pay tax on half of the value of the assets.)

              e.           Controlling shareholders (only) get 50% BPR on assets owned by them personally but used by the company.

              f.            Controlling shareholders of PLCs get 50% BPR on their shares (although if you control a PLC you are one of a very rare breed).

              g.           Generally there’s no actual need to work for the business, or be actively involved in management. The fact that you are a financial backer (such as a sleeping partner or an inactive shareholder) can be enough to get you BPR.

              h.           Everybody is denied BPR on the investment element of the business, so part of the claim will be rejected if the business holds assets such as lots of cash, stockmarket investments, or properties which are let.

              i.            You generally need to have had the business interest in question for over two years to get any BPR.
             
2.           These rules are very generous compared to taxes we’ve had in the past. There’s a good chance that this won’t last. Tax plan now.

3.           You need to be quite careful to ensure that what your business does really is business, as distinct from letting or investment. A business which is chiefly based on rental income, for example, isn’t a “business” in the “business property relief” sense of the word. 

              Just to emphasise the effect of my points 3 and 1(h):

              i.            if the business is mainly investment or letting then you don’t get any BPR at all, on any of it (even the non-investment/letting part); but

              ii.           even if you do get BPR on the business as a whole, it’s refused on the part of the business’s value that is attributable to investment/lettings.

4.           Gifts of your business assets are likely to have capital gains tax consequences. Make sure that any tax plan takes into account the impact of both taxes.

5.           In the case of a lifetime gift, there is a particular trap to watch out for, in the “clawback” rules. These kick-in if BPR is claimed, but the assets in question stop being eligible for BPR by the time the giver dies. These force you to go back and recalculate inheritance tax as if BPR had never been available in the first place, which of course could be a disaster.

6.           The single most important thing in estate tax planning for people whose assets potentially qualify for BPR, is to ensure the BPR is “used” (not “wasted”). It can be used in two ways: firstly by passing the business directly on to a lower generation (e.g. children/grandchildren) or secondly by putting the business onto a First Death Discretionary Trust. BPR gets “wasted” by leaving the business outright to the surviving spouse. The reason this is a waste is that you have used two reliefs (business property relief and the spouse exemption) against the same assets when either one would have done, in consequence of which the surviving spouse has got richer. Then, the surviving spouse can live on for many years, eventually retiring and selling-out of the business, then dying with a huge wodge of cash to be taxed at 40%.

              So if you only take one message from this posting, then it’s this one, which I will set out in big bold lettering for you:

              DON’T WASTE YOUR “BPR” WHEN YOU DIE!!!

7.           This final point isn’t so much a strategy in its own right - more an important problem to be aware of.

              When you sell a business, you are turning an asset (the business) which potentially qualifies for 100% BPR - making it tax free - into another asset (cash) which is going to be taxed in full at your death. There is action you can take to deal with this problem, so you should be sure to take advice on the point before you start negotiating any sale.