TT135: Business Property Relief

March 23, 2009

In this issue of Topical Tips, we look at the relief from Inheritance Tax (IHT) on business property and a recent case that has made the relief even more beneficial.

Transfers of Values

IHT arises when an individual makes a Transfer of Value (TOV). A TOV is made whenever a living person (the Donor) gives something away, say to his children or to a trust. When an individual dies, he is deemed to make a TOV of all of his estate at market value. Business Property Relief (BPR) can reduce the amount of IHT payable.

BPR Explained

  1. BPR relieves ‘relevant business property’ from IHT – i.e. it is exempt from the tax.
  2. Relevant business property includes:
    • A business or an interest in a business (e.g. as a sole trader)
    • Shares in unquoted companies
    • Land and buildings used wholly or mainly for business purposes
  3. BPR only applies to property held for business purposes at the time of the TOV and those assets must have been owned for at least two years beforehand. (Note that if the donor has contracted to sell property before he makes the TOV, BPR is not available.)
  4. BPR does not apply to shares in companies quoted on recognised stock exchanges. The London Stock Exchange is a recognised exchange, AIM is not!
  5. BPR does not apply to investment businesses. This exclusion would apply to shares in an investment business quoted on AIM.
  6. Even if the business as a whole qualifies for BPR, some assets of the business may be excluded (for example, if they are surplus assets and not used in the company’s trade, e.g. a property that is sublet to a third party).

BPR and business assets

Until recently it was thought that if a sole trader gave away an asset of his business, rather than the business itself, this transfer would not qualify for BPR.

For example, if Joe the Plumber gave away a piece of land he used for the purposes of his plumbing business, it was thought that this gift would not qualify for BPR, even though a gift of the business itself (or of shares in Joe the Plumber Ltd) would.

The High Court has now confirmed that a gift of land by Joe in these circumstances does qualify for BPR. The test case involved a farmer, the late Nelson Dance, who transferred some farmland into trust. This was a chargeable TOV for IHT, but to an extent the charge was relieved as it benefited from Agricultural Property Relief (APR). However, the value of the land included significant development value, which does not qualify for APR. The development value of the land would therefore be subject to IHT unless BPR was available.

The Court confirmed that Mr Dance’s estate suffered a loss in value when he gave the land away. That loss was a loss in value of a business or an interest in a business. It was therefore subject to BPR, even though, after the transfer, it was no longer held for business purposes.

This makes life simpler and more predictable than previously: if an asset is part of your business and qualifies for BPR, and you give away that asset, the loss in value of your business caused by the transfer will benefit from BPR, no matter to whom you give it or why.

This new ruling opens up important tax planning opportunities that should be reviewed to ensure you are aware of your options.

Barnes Roffe Topical Tips:

  • Get advice to ensure you make the most of IHT reliefs and exemptions.
  • Ongoing planning can significantly increase your kids’ inheritance.
  • Remember APR only applies to the value of land and buildings used for farming. Any non-farming value – such as development value – is excluded.
  • BPR is available for qualifying businesses and assets. This may include the value of land owned by the business, including its development value.
  • Do not assume that because you own a business it will qualify for BPR – there are conditions and restrictions that could exclude or reduce the relief.
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