Business Property Relief – 5 Pitfalls You Must Know About

Business Property Relief (BPR) has been an established part of the Inheritance Tax (IHT) system since 1976. This investment incentive means that once you’ve owned shares that qualify for BPR for more than two years, they’re free from IHT once the shareholder passes away.

The majority of business owners know about BPR because they believe that they can shelter the value of their business interest from IHT because of it. However, the truth is, BPR comes with its own set of restrictions and conditions. This can lead to an overall loss in the long run.

At Newnham & Son, we believe that you should know all the details before investing in anything. And, that goes for BPR too. With this in mind, we’re going to explore the various pitfalls of IHT business property relief and how these could affect you.

1. Stocks, shares, and many other dealings

While IHT business property relief may be great for some, you won’t be eligible if your company deals mainly in the following:

• Stocks
• Shares
• Securities
• Land
• Buildings
• Making or holding investments

This includes any business interests and unquoted company shares. When it comes to holding investments, the shareholders of an owner-managed company who primarily operates a rental property business wouldn’t qualify for BPR, for example.

2. Your eligibility depends on your shares

Whether or not you qualify for BPR depends primarily on your shares. Basically, if the majority of your business doesn’t fall into any of the above categories then you’re eligible. On the other hand, if 51% or more of your company operates in any of the other industries mentioned above then it won’t qualify. Simply put, your investment, trading, stocks, and any other non-eligible activities can’t make up the bulk of your business or you won’t qualify for business property relief.

3. Anti-avoidance provision for ‘excepted assets’

An ‘excepted asset’ is one that you don’t use predominantly for the purpose of the business throughout the time building up to the transfer of value. You also shouldn’t need it during the transfer of value for the future of the purpose of the company.

If you breach this condition, there will be BPR restrictions by the value attributable to the excepted asset. This means that BPR only reduces that part of the transfer of value. BPR doesn’t reduce the other part and you’ll have to pay inheritance tax on it.

4. Following a partner’s retirement

If a business partner retires and they keep a financial interest in their capital account, this won’t attract BPR. this is because the retiree is a creditor of the business. But, that’s not all. If a trading shareholder makes a cash loan to the business, this also won’t qualify for BPR upon the individual’s death.

Despite this, if a shareholder uses funds to subscribe for extra unquoted shares of the business, this could qualify for BPR. However, this is only applicable once the minimum hold of two years is complete. This must also meet all the other BPR requirements listed in this article.

The above also applies if the shareholder acquires the extra shares under a rights issue. This is because BPR comes with a ‘replacement property’ rule which means that the normal two-year ownership condition doesn’t need to be met to qualify for BPR in these instances.

5. Binding contracts

When it comes to BPR, make sure you avoid binding contracts.  At the time of transfer, if there is a binding contract for the sale of the business property, you won’t qualify for BPR. Instead, consider making arrangements whereby the deceased’s interest passes to one of the surviving owners. Also, make sure that this business owner pays the personal representatives an accruer clause. Alternatively, they have the option to buy instead.

Contact your local financial adviser for Business Property Relief tips

As you can see, business property relief is a complex part of the inheritance tax system. To qualify for it, it’s important that you meet all the requirements and abide by certain conditions. Talking to a local financial advisor or accountant can help shed some light on the issue at hand.

At N&S, we work closely with our clients so that they know the ins and outs of all inheritance tax requirements. If you’d like to find out more about how we can help you and your business, contact us today. Our team has the expertise and knowledge to answer any questions you may have.