Business relief is one of the most important inheritance tax reliefs available as it reduces the value of certain transfers liable to inheritance tax by up to either 100% or 50%. It is also called ‘business property relief’.
Business relief can be claimed either on death or on any other chargeable event. It is available on certain kinds of business assets that qualify as ‘relevant business property’ provided the transferor fulfils a minimum ownership period.
Business relief is available at either 100% or 50% on the transfer of relevant business property, which falls broadly into five groups:
|A business or share of a business (ie a sole trade or share in a partnership).||100%|
|Shares in an ‘unquoted’ company (which includes those traded on the AIM and similar markets).||100%|
|Shares or securities in a ‘quoted’ company that, together with any other shares or securities owned by the transferor, give control of the company.||50%|
|Buildings, land, plant or machinery used in the business of either a company of which the transferor had control or a partnership of which he was a partner.||50%|
|Buildings, land, plant or machinery held in a trust and used in the course of a business carried on by a beneficiary with an interest in possession.||50%|
Relevant Business Property
While the above categories encompass many businesses, ‘relevant business property’ excludes businesses that are ‘wholly or mainly’ concerned with:
- dealing in stocks, shares or securities;
- dealing in land or buildings; or
- the making or holding of investments.
These businesses generally will not qualify for Business relief, however there are some exceptions.
The business assets must be owned by the transferor for at least two years before the relevant transfer in order to qualify for Business relief unless one of the following reliefs applies:
This relief concerns transfers that occur as a result of death and may extend the ownership period in certain circumstances involving transfers on death.
Property may also be treated as satisfying the two year ownership requirement where it is relevant business property and replaces other relevant business property. There are specific timing conditions to be met for these rules to apply.
Pitfalls to Avoid
Contracts for sale
If business property is transferred when it is subject to a binding contract for sale then the transfer will not qualify for Business relief. This pitfall covers a range of circumstances and should be carefully considered to avoid losing this valuable relief.
Anti-avoidance rules exist that prevent individuals from claiming full Business relief on businesses and ‘unquoted company’ shares that are heavy with investments and cash reserves to protect those assets from inheritance tax. A full analysis of the business is important to make sure the BR is maximised.
Further requirement for lifetime transfers
Where the donor does not survive the seven year period there is a further condition to be met when the failed potentially exempt lifetime gift comes into charge. Advice should be taken at the time of the gift so that the Business relief is not inadvertently lost.
How can Smith & Williamson help?
The conditions to qualify for Business relief are strict and failing to meet the criteria can expose an individual to higher rates of inheritance tax. We can give specialist advice to maximise Business relief and make recommendations for structuring gifts to ensure the benefit of family assets is preserved.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.