Know Your Law

Nov 7 2006 Martin Barber, Vantis Plc, Evening Gazette

In a recent Gazette column, I referred to the need to maximise Business Property Relief (BPR) as one of nine ways to reduce the Inheritance Tax bill.

As there are so many subjects for an entrepreneur to consider when setting up a business, it is not surprising that BPR on the lifetime gift of the business or on the death of the proprietor is usually overlooked. As the business grows and diversifies, this can be an increasingly costly oversight.

Current BPR legislation allows the value of "relevant business property" to be reduced by either 100% or 50%, subject to certain stringent conditions. Relief at 100% is available on:

* A business or an interest in the business, including a partnership;

* Any holding of unquoted shares (including shares dealt on AIM and OFEX);

* Unquoted securities where the taxpayer has a controlling interest in the unquoted trading company.

However, business property must be held for at least two years in order to qualify for either 100% or 50% BPR unless certain conditions are met. There are also other pitfalls:

* The wholly or mainly test: Investment activities do not qualify for BPR but if a business carries on both trading and investment activities and the main activities are trading, relief may not be denied. This test is an area of much debate between the tax profession and HMRC.

* Cash: HMRC would look to view a large amount of cash on the balance sheet as an investment unless it can be shown that the funds are for a specific purpose, which relates to trading activities.

* Other assets held by the business: Assets, such as a flat in Majorca, held for the personal use of the directors but not used in the business itself could be treated as an excepted asset and may reduce the transfer of value on which relief would be available.

If the Spanish property was for the benefit of all employees, with the associated benefit-in-kind income tax charge applicable, it could be argued it is not an excepted asset and BPR should be available on the full value.

* Binding contracts for sale: BPR is not available where the relevant business property is subject to a binding contract for sale - e.g. where, on the death of a partner, the remaining partners are bound to purchase the deceased partner's share. One simple way around this is for the surviving partners to be given an option to buy the share of a deceased partner.

* So what to do now?: BPR is a very generous relief but is not straightforward. Each situation should be viewed in relation to its own set of facts. The current 100% and 50% BPR rates may also be halved in the future so taxpayers must be proactive.

* Vantis plc is the AIM listed UK top 13 accounting, business and tax advisory group that specialises in helping growing businesses. The Vantis group now has more than 1,000 staff operating from 19 locations throughout England. In the North-east, it has offices in Middlesbrough, Hartlepool and Darlington. For more information about Vantis, visit: www.vantisplc.com