Act now to get benefit of this tax relief

Sep 30 2009 by Keith Hately, The Journal

BUSINESS property relief (BPR) is the single most valuable relief from inheritance tax available to business owners.

Using BPR the business can be passed to the next generation either during the owner’s lifetime or on their death entirely free of inheritance tax.

BPR is available on shares in an unquoted company owned for at least two years.

Typically this applies to a family business. BPR is only available for trading companies as opposed to investment companies. No relief is given if the business is wholly or mainly dealing in land or buildings, or making or holding investments.

The “wholly or mainly” test is applied in the case of a mixed business with both trading and investment activities.

The test is “all or nothing” so that a business involving dealing in land or holding investments may qualify for relief provided that this is not its main activity.

Not surprisingly, this has led to a raft of case law between HMRC and the taxpayer, mostly centred upon businesses involved in property development. Property development qualifies for relief whereas property dealing does not and there is a fine dividing line.

In a group structure the taxpayer holds shares in the holding company. Generally if the subsidiary companies would pass the test for BPR then relief will be given on shares in the holding company.

BPR will be denied on any asset within the business not used wholly or mainly for business purposes. This prevents business owners from sheltering cash within the business. However, the ‘excepted asset’ rule can catch out the unwary business with substantial cash reserves. Business owners must be able to demonstrate that the cash is required for future business use. Evidence of contemporaneous board minutes and intended use of cash is extremely important.

With 100% BPR you can transfer all or part of your business to your children or, if you wish to retain control, to a family trust for their benefit; and you should include a discretionary trust in your will to maximise BPR and create the flexibility to do what is best for your family when your time is up!

BPR is a hugely valuable relief for business owners. Pressures on the Exchequer will continue well beyond the next general election and the continuation of BPR at 100% must be questionable so now is the time to act.

Keith Hately is a partner at Watson Burton LLP