If you own significant business assets, then business property relief or BPR may well be an important tax-saving measure for the future. It is designed to reduce your inheritance tax bill as long as you meet certain criteria.
The criteria for qualifying for business property relief are fairly simple. You need to have owned the business or its assets for more than 2 years before your death (unless you inherited the asset from a spouse) and it should be what is termed a going concern – in other words operating to make a profit.
The 50% trading test means that no more than half of the business is made up of investment activities. For example, if you have a business that entirely acquires land solely for investment purposes, you will not be eligible for business property relief.
If, however, you buy land and build on it or develop it, then you will be eligible.
Companies that are listed on the main stock exchange are not able to access BPR. Not-for-profit enterprises are also excluded.
Assets for enterprises from sole traders to private limited liability companies and partnerships are generally eligible even if they are listed on the alternative investment market.
Here we look at how business property relief can be used to reduce inheritance tax for a wide range of enterprises and the transfer of business assets at the time of your death.
What is Business Property Relief (BPR)?
Business Property Relief (BPR) is a tax relief that reduces the amount of inheritance tax that is payable on business assets. These can include the business itself as well as assets, including unquoted shares, buildings or land.
It was introduced in 1976 to help family-owned businesses survive after the death of a founder or owner.
How does Business Property Relief work?
Relief can range from 100% to 50%, depending on the type of asset. For example, if there are unquoted shares in a trading company that are worth £100,000 and the shares qualify for 100% BPR, no inheritance tax will be payable on them even if you have gone over the threshold.
Much depends on the type of business asset being transferred at the time of death, and for larger estates, this can make things complicated to manage for executors.
What types of assets qualify for BPR?
The assets covered under business property relief include unquoted shares, property, land and machinery as well as the entire business itself. The level of tax relief varies in the following way.
For 100% business property relief:
- This includes the business or interest in a business (including a minority interest) as well as the value of shares if the company is unlisted.
50% relief is available for:
- Quoted shares that provide overall control of the company.
- Land, buildings, machinery, and plant assets are used by the business and are carried on by a company or partnership.
- Land, buildings, machinery, and plant are under a life interest and used in the business, which is also run by the beneficiary.
This means that you do not have to pay inheritance tax on the first half of the value of these assets, but you will need to register with HM Revenue to pay tax on the amount outstanding.
Is business property relief available for inheritance tax purposes?
The inheritance tax (IHT) rate in the UK is 40%. It is only charged on the part of your estate that’s above the threshold.
This threshold is currently £325,000 (£650,000 for spouses or those in a registered civil partnership). This means that if your estate is worth less than £325,000, you will not have to pay any IHT.
If you have personal assets such as a home and other property and business assets on top of this, without BPR you could end up paying a sizeable amount in inheritance tax.
What does not qualify for Business Property Relief?
There are certain business property assets that do not qualify for BPR. If more than 50% of your business is involved in investment (for example, you buy land or property purely to gain investment income), then you are not eligible for relief.
Assets that are not used in a business are also not eligible. An example of this would be a car used to drive to work each day. Not-for-profit organisations are also not eligible.
How to claim Business Property Relief?
Business relief can be claimed by your executors once you pass away as long as your enterprise meets the 50% investment rule. The percentage of relief will depend on the type of asset being transferred.
If you have 100% tax relief on a particular asset, you don’t have to do anything as no amount is due to HM revenue. With 50% business property relief, you will need to pay the appropriate amount directly to the tax office.
This will be 40% of half the value of the asset that is above the inheritance tax threshold.
Does BPR benefit private or limited company landlords?
Private or limited company landlords generally have two sources of income. These are the investment value of the property itself and the income that they get from rental revenue.
According to the 50% investment rule, it’s highly likely that they would not go over the threshold – in other words, the value of the investment would not be larger than the income derived from the renting of the property.
This can be quite a complicated area which is why it’s important to get the right tax advice as a landlord when considering business property relief.
If you don’t qualify for business property relief, then there are other options. If you are transferring property, of course, you need to consider issues such as capital gains tax.
Get advice on property relief today
Understanding what relevant business assets you have and how these might affect your inheritance tax planning is important. Whether waiting to transfer property before your death is the best tax-efficient option can be difficult to determine.
For example, it might be more efficient to make a lifetime gift even though you may need to pay capital gains tax.
When it comes to estate planning and the right property relief, it’s important to discuss things with an experienced team of accountants.
At VW Taxation, we can help you plan for the future and reduce inheritance tax for areas such as relevant business property. Contact our team to find out more today.
Conclusion
Planning for the future can be a complicated business but there are several areas where you can find substantial tax relief. If you own a business or a share in one, business property relief can give you 100% or 50% relief on certain assets and greatly reduce the amount you finally pay HM revenue.
