Business Property Relief (BPR) is one of the most generous reliefs from inheritance tax still available, offering as it does 100% relief from inheritance tax (IHT) in qualifying circumstances. As such it is highly sought amongst owners of family businesses and shareholders in family companies. Taxpayers restructure to qualify for it, change their investment strategy to benefit from it, protect, preserve and bank it. You only need to look at the number of trusts set up to take advantage of this relief to see that this is so. And then nothing changes. Is this a case of advisers’ crying wolf?
"...the first question is whether or not to ‘bank’ the relief..."
As with many UK tax reliefs, the concept of BPR is straightforward but the devil is in the detail and there is often a compromise to be made between qualifying for this relief from IHT and mitigating other taxes, such as capital gains tax (CGT). There isn’t sufficient room in this post to cover the rules of BPR in detail but see my article for the Field Court Tax Chambers Digest 4th Edition which is on the Articles section of my website. Instead, in this post I want to touch on two commercial and strategic questions that are particularly important at the moment with increasing property prices, the spectre of inflation and proposed reforms of capital taxes rumoured.
The first question is whether or not to ‘bank’ the relief by passing qualifying assets to the next generation now with the benefit of the relief rather than waiting until the donor’s death or some future date with the risk that BPR may not be available. Banking BPR can be relatively straightforward to achieve by a straightforward gift, although care must be taken to ensure that there is no reservation of benefit by the donor. If, as is often the case, the donor is happy to no longer benefit from the property gifted but wishes to retain control, trusts can provide an effective solution. The commercial difficulty here lies not so much in preserving BPR, but in weighing up this advantage against others. For example, a gift now may not give rise to an immediate CGT charge if the gain is held over. Instead when the recipient sells the assets, subject to the availability of other reliefs, they will pay CGT on the increase in value from when the donor acquired the asset and not just the increase in value whilst they owned it. However, if the asset passes to the recipient on death, its value is uplifted to market value, and therefore all of the taxable gain up to the point of death is wiped out and the asset can be sold CGT free, if sold shortly thereafter. In the same way, there are implications for other tax planning that need to be considered – the availability of Business Asset Disposal Relief, the efficient extraction of cash from a company etc. On the other hand delaying the gift may mean equally severe constraints in preserving the BPR – avoiding investments, monitoring surplus cash and controlling its use, avoiding contracts for sale hidden in shareholders agreements, merging or demerging businesses etc.
This brings me to my second question: whether or not to envelope investment property within a trading company or group. Any business that consists of “wholly or mainly” dealing in securities, stocks, and shares; or dealing in land and buildings will not qualify as a relevant business for BPR purposes. Conversely a company whose business consists of less than 50% of those activities may qualify. The test is a binary pass-or-fail, where failing means no BPR, and passing can mean full BPR. Businesses that deal with matters such as rental properties and land-intensive businesses such as car parks or bed and breakfasts should therefore be considered very carefully. However, assuming the 50% test can be met, the total value qualifies for relief with the exception of any assets not used for the purposes of the business. Here the test for excepted assets is concerned with the business (not the trade) of the company or group. For example if 49% of the business is the operating of a property rental business, that property investment portfolio might qualify for relief even though if held separately from the trading activity it would not. So do you seek certainty and remove or separate all assets that are not clearly used for the trade and thus secure relief on part or do you amalgamate the trading and investment businesses with the inherent risk of losing BPR on the whole but the possibility of extending the relief beyond the trade. The structuring of corporate groups and the location of properties used by the group for its trade or held as investments can therefore be critical in determining whether or not there is a qualifying business. Thorough review, formidable record keeping and ongoing advice are required for success.
In short, it is easy when successive Budgets make no changes to put off answering these questions. Nevertheless this relief has never been so advantageous and there are an increasing number who argue that this is unfair and unsustainable. Whatever your view, the key point now is to weigh up the options and either take full advantage of the relief while you can, or structure for the maximum advantage in the future while minimising risk of forfeiting this important relief.
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