Guard Your Business Property Relief!

One of the most valuable reliefs available for company owners for Inheritance Tax is Business Property Relief (BPR).

In a family company context, BPR is given at 100 per cent for shares in unquoted companies and at fifty per cent for assets which are used in the business controlled by the transferor. There are various requirements which must be satisfied to qualify for BPR but the main one is that the assets must have been owned by the transferor for the two years prior to the transfer. If the transferor (or transferee) dies within seven years of the transfer, the business property or ‘replacement property’ must still be owned by the by him or her. Replacement property is property which would qualify as business property, but where the original property has been sold and its proceeds reinvested within three years. There are other ways replacement property can arise, such as on share-for-share exchanges.

There is a common pitfall which can affect BPR where replacement property is bought out of the sale proceeds of the original property which qualified for BPR. When the property which is transferred is replaced, but the whole of the proceeds of the original property (net of expenses) are not reinvested in the replacement property, the relief is completely lost. So, if property is sold for £400,000, with £30,000 of expenses, the replacement property bought must be at least £370,000, otherwise the BPR available on the whole of the £400,000 will be lost. This could increase an IHT bill by £160,000.

Another common problem results when borrowing is undertaken on the company assets. If this is secured on an asset or assets of the company, the BPR is limited to the value of the asset net of the borrowing. If, on the other hand, the borrowing is secured on another asset outside the company (say a house), then the BPR will be available on the gross amount.

There is no substitute for care in structuring transfers and taking advice well in advance. The laws governing IHT on business assets are complex and there are interactions with other taxes, particularly Capital Gains Tax, to consider. Never act before you have taken considered advice.


Partner Note
Refs: IHTA 1984, S105, S106, S113A and 113B