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  • Katherine Bullock

Running to keep up – Halloween Notes on BPR and the Spectre of Change



Business property relief (BPR) is an extremely valuable relief. Where the relevant conditions are met, it can provide complete, 100% relief, from IHT on a transfer of value attributable to unquoted shares or a business or interest in a business. It is also a complex relief and the legislation requires and rewards very careful reading.


"The way that BPR is calculated in the case of mixed businesses leads to difficult practical and commercial considerations for private client practitioners..."

To qualify, a business must be carried on for gain and must not wholly or mainly comprise of dealing in securities, stocks or shares; dealing in land or buildings; or making and holding investments. The negative phrasing of this test means that what qualifies as a business for IHT purposes may differ significantly from what qualifies as a business for other tax purposes. This is equally true for traditional landed estates and for companies carrying on a property letting business, creating both opportunities and challenges.


The test is all or nothing: a business either qualifies or it does not. The meaning of business and the making and holding of investments for these purposes has been subject to extensive judicial consideration. The Courts have held repeatedly that property rental businesses, however large and however actively managed, comprise the making and holding of investments. Accordingly, a company whose business consists of letting residential or commercial properties will miss out on BPR entirely. In contrast, a company whose business is to actively develop land, building and holding land as trading stock, may qualify.


But all may not be lost for our property rental business. Shares in an unquoted company carrying out mixed business activities consisting of 51% or more the carrying out of a qualifying business and 49% or less of property letting would qualify for BPR in full. The test is not mathematical; it is necessary to form a view of the business in the round and over a period of time.


Having determined whether or not the relief is available, it is next necessary to decide whether it is restricted for the value of excepted assets. An excepted asset is an asset that is not used for the purposes of the company’s business. There is no requirement that an asset must be used for a trading purpose or that it must not be used for an investment purpose. As the definition of business is wider than the definition of trade, it can encompass a property rental business, provided that there is sufficient activity and the rental property business is operated as an integral part of the mixed business. As a result, the full value of the shares in our company may qualify for relief without restriction.


The company must meet the test at the point at which the availability of BPR is determined. This requires careful monitoring as activities wax and wane – a point that may be overlooked, particularly where shares are acquired in companies over which the shareholder has little control or detailed knowledge, for example a portfolio of Alternative Investments Market (AIM) listed shares.


The way that BPR is calculated in the case of mixed businesses leads to difficult practical and commercial considerations for private client practitioners. Is it prudent to separate investment activity from trading activity in order to (hopefully) obtain certainty of relief on part and the option of alternative succession planning on the rest? Does such action disadvantage your client considerably by depriving them of relief on the non-trading part which would otherwise have qualified as part of a mixed business? Weighing up the risk and reward in these situations is difficult. Doing nothing is always an option. IHT is not the only consideration; the decision may also be impacted by wider tax, commercial and family considerations.


In the case of traditional estates, the position is even more nuanced. Many estates have diversified over time in order to adapt to modern farming methods and commercial reality. Sporting activity, farm shops, visitor attractions may have sprung up. Properties may have become surplus to requirement and are now let in order to contribute to the wider business. In these cases, there may be a single composite business that is predominantly not an investment business. The excluded asset restriction again may be irrelevant here.


With a corporate group, it is also necessary to consider where rental property is held. This can make a significant difference to the availability and the quantum of relief. The legislation provides three distinct steps. The first step is to determine whether the holding company’s business comprises wholly or mainly being a holding company. The second step is then to determine whether the businesses of its subsidiaries together comprise wholly or mainly the making or holding investments or another non-qualifying activity. If these tests are met, BPR is available. The final step is to consider each subsidiary individually to determine whether its business wholly or mainly comprises a non-qualifying business. If so, the value of the holding company that qualifies for BPR will exclude the non-qualifying subsidiary. However, this exclusion does not apply to properties rented out between different group companies or to inter-group loans. Such lending and letting is considered to be ‘non-investment’ provided that the amounts are reasonable in the context of the group’s overall activities and that the loans and properties are used for the carrying on of the group’s business.


The application of the test for corporate groups can have surprising results where rental properties are spread amongst a holding company and its subsidiaries. Care is therefore needed both as to the proportion of rental properties within a single company and the position of any such company within the group.


Whether despite or due to its complexity, BPR remains for the moment a valuable and surprisingly flexible relief. With the spectre of change in the air, even if delayed, now is the time to take action to review, preserve and, where possible, secure BPR.

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