In the world of property business, it is challenging to manage your finances. There are many expenses to consider and plenty of taxes to pay. Luckily, there exists a reduction in your tax bill in the form of relief. Taking advantage of that relief to minimise the amount of tax you owe is a skill. You can learn it too. Let’s discuss BPR inheritance tax and how to qualify for it.
What is Business Property Relief?
First, let’s clarify what business property relief (BPR) is. You can use BPR to decrease the amount of inheritance tax you owe on specific business assets. The main incentive for introducing BPR as part of the 1976 Finance Act was to help businesses owned by families. Specifically, in case of a loss. The family could continue to trade without selling the shares or the entire business to pay inheritance tax.
Since it was introduced, the BPR has developed. It is now the ideal way to reduce tax deduction in case someone passes away or lifetime gifts are involved. Back in 2013, investors were allowed to hold BPR- qualifying, AIM-listed shares in an ISA. Thereby, making them even more beneficial for inheritors. It is possible that it will continue to change for the betterment of inheritors.
What Types of Businesses Qualify for BPR Inheritance Tax?
You may be wondering if your business qualifies for BPR. Well, it does, if it is not listed on any main stock exchange. Which results in public limited companies not qualifying.
This benefit is available for limited liability partnerships, sole trader businesses, and private limited companies. If your company falls under any of those categories, then maybe you are fortunate enough to qualify for BPR inheritance tax.
Consider the following examples:
- A family business that is handed down from generation to generation.
- Any shares in companies that are listed on the Alternative Investment Market (AIM)
- All shares in unquoted companies, even in the case of you holding a minority.
As of 6 April 1996, if you own a sole trading business, you can qualify for 100% BPR by transferring the entire business entity to another. This case has some exceptions, such as transferring buildings, machinery, or land.
The Criteria for Qualifying for Business Property Relief
The good news is that most partnerships and businesses qualify for BPR if they pass a test. It’s a 50% trading test. HMRC states that less than 50% of the activity of your business must be formed of investment, such as:
- Retaining investments.
- Buying shares and stocks.
- Purchasing buildings or land.
This means that any business within the property investment industry does not qualify for BPR inheritance tax. As it falls under the category of buying and selling property or land without any changes.
Although, it is a bit more complicated than that. A property development company can qualify for BPR. It can qualify even if only 51% of the business’s activity consists of active trade.
Another aspect to consider is the winding up or amalgamation of your business. If your business is in going to wind up at the time, or within a year of your passing away, then it does not qualify. The best thing you can do is reach out for expert advice to check if your business qualifies.
How to Use Business Property Relief to Reduce Inheritance Tax (IHT)?
Now, that you know if your business qualifies for BPR or not. Let’s talk about how you can use it to reduce inheritance tax (IHT). In the tragic case of someone passing away, the administrator of the estate can claim BPR when calculating its value. The executor of the will can also exercise their right to claim the BPR inheritance tax.
Here is the step-by-step process:
Step One: Calculate the value of your business or its assets.
Step Two: Figure out if the business qualifies for only 50% BPR or the full 100%. In case of any doubt, ask for help from your financial adviser. If you are fortunate enough to qualify for 100% BPR, then this is the last step.
Step Three: If not, then you should get your IHT reference number through HMRC. You can do so by post or by applying online. Get this three weeks before making your payment.
Step Four: You need to submit a IHT400 form and schedule IHT413 to HMRC.
Step Five: Lastly, you must pay any inheritance tax you owe within six months of their passing away.
What Assets Qualify for Business Property Relief?
Once your business clears the 50% trading test, it is time to qualify for 100% BPR inheritance tax.
Qualifying assets include:
- Securities that are unquoted and provide control over an unquoted company (whether combined with other unquoted securities and shares or alone).
- Any business or simply an interest in a business.
- Shares that are unquoted (including those listed on the AIM).
Assets that qualify for only 50% BPR:
- Machinery, buildings, or land that are exclusively for business use.
- Quotes shares that provide you with control over a company.
- Buildings, machinery, and land that are in use of a business run by a beneficiary.
If the assets of your business fall under any of the above-mentioned categories, then good for you! Unfortunately, some assets are left out from qualifying for BPR. For example, Buy-to-Let property, because it is entirely investment. The following assets are also left out from qualifying:
- Any property where the shareholders are the owners, and a company uses it.
- Non-profit organisations and their assets.
- All the assets which fulfil the criteria of qualifying for Agriculture Property Relief.
- Any loan given to partnerships or companies.
Examples to Understand How BPR Works.
Understanding the intricacies of IHT is not easy. Therefore, let’s look at examples to give you a clearer idea of how it all works.
Suppose Heather’s father runs a car repair garage as a limited company. Before his passing, he signs his company along with its assets over to Heather. Now, Heather is the sole owner of this car repair garage. This gives Heather the opportunity to avoid a huge inheritance tax bill. That is, if her father’s nil-rate band is less than the company’s worth.
Another scenario would be if Heather’s father had a partner working with him. As in, the garage was run under a partnership. The partner or friend could still want to stay in the business. In that case, he would leave Heather with buildings, machinery, or even land that is exclusively for business purposes. Heather can then claim 50% BPR on these assets. The same thing applies here: the assets’ worth should be more than the father’s tax-free allowance.
The Downsides of Claiming Business Property Relief
Now that you comprehend the workings of BPR inheritance tax, it is time to talk about its pitfalls.
Surely, BPR is ideal for those who want to continue running the business and benefitting from it. If no member of your family wants to keep the business going, then it’s of no use to you. Or if they would rather have the cash from the assets, then it is also not an option.
Capital Gains Tax and Lifetime Gifting
At this point, you have figured out if your business qualifies for BPR or not. In the unfortunate event that it doesn’t, consider lifetime gifting. It is a tax-efficient option for those who cannot claim other tax reliefs.
What you need to do is a gift a ‘relevant business property’ (RBP) to whoever you chose as a successor. You must do this a minimum of seven years before your passing to avoid some inheritance tax. It classifies as PET, potentially exempt transfer.
If your decision is to turn your business into a lifetime gift, then you should no longer benefit from it. If not, then it falls under the ‘gift with reservation of benefit’ category. In which case, the person you bestowed it upon must pay inheritance tax on some or all business properties. Which may be more than before you made a PET.
Examples help clear things up, so here is another.
Allison owns multiple BTL properties, which of course do not qualify for BPR. What Allison can do is sing over those properties to her children. Or she can place them in a trust, that is, if she is no longer receiving income. Now, if Allison lives on for seven years or more, no one owes any inheritance tax.
This is a great way to avoid paying IHT without claiming any Business Property Relief.
The Need for a Financial Adviser
When it comes to inheritance tax, it is best to let an expert handle it. In most cases, that expert will be an Independent Financial Adviser (IFA). You give the wrong impression to HMRC if you try to deal with tax efficiency all by yourself. With the help of an IFA, you can reduce inheritance tax to a minimum. They will explain all the options available to you. In case you don’t qualify for BPR, they will find other ways to help your beneficiaries benefit from your assets.