Business property relief (BPR) is one of the more valuable tax reliefs available to business owners because it reduces the value of an estate for IHT purposes on both life and death transfers.
The amount of BPR available is:
- an unincorporated business, such as a sole trader;
- an interest in an unincorporated business, such as a partnership;
- shares in an unlisted company, including companies listed on the Alternative Investment Market.
50% BPR for:
- shares in a quoted company which give at least 50% of the voting rights;
- land, buildings and/or machinery used in an unincorporated business in which the deceased had an interest or in a company controlled by the deceased.
Many owners assume that just because they have shares in a company, for example, no IHT will be due on their share of the company (100% BRP relief). However, it is easy to get into a situation where this is not the case as two conditions need to be fulfilled. At first reading, these conditions look easy enough to fulfil however, delve further and problems can arise.
The two conditions are:
- the shares need to have been owned for at least two years; and
- the company must carry on a ‘trading’ business rather than an ‘investment’ business.
Problem 1 – too much cash
Assets not used ‘wholly or mainly’ for the business during the last two years, or not required for future business use cannot come under the claim – importantly, included here are high levels of cash. HMRC considers ‘excessive’ cash balances to be ‘excepted’ assets. As a general rule, any cash that is more than is reasonably needed for a business’s present and future requirements is likely to be treated as excessive. For example, money needed to service delays in customer payments would come within the realms of ‘future business use’. However, HMRC would expect to see firm plans in place as to intention (e.g. for business expansion). Should withdrawal of monies be possible then the shareholder may have to weigh up the tax cost of loss of BPR against the cost of extracting cash from the business in the form of salary or dividend.
If the company owns assets mainly used privately, these will reduce the value eligible for BPR in the same way as the cash balance.
Problem 2 – binding agreements
One common problem is where there is a shareholder’s agreement in place such as a provision for the surviving shareholders to purchase the shares of a deceased shareholder for the deceased’s estate. In this situation, HMRC will argue that this constitutes a binding contract for sale and deny BPR. The advantage of such clauses is that they restrict shares from being acquired by anyone other than the current shareholder owners. A way to counter this is to replace such a clause with a cross-option agreement, where the surviving shareholders have the option to buy the shares and conversely, the estate has an option to sell them. The sale will depend on either option being exercised and so cannot be a binding contract.
- BPR will be denied in other circumstances, the usual one being if the company deals mainly in land and buildings e.g. the shareholders of an owner-managed company primarily operating a rental property business.
If a business partner retires but retains a financial interest in the capital account. In this case, BPR will not be available because the retiree will be a creditor of the business.
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