Business Property Relief
The relief can be claimed on transfers of certain types of business and business assets if they qualify and the person transferring them (‘the transferor’) has owned them for a minimum period. The relief can be claimed in lifetime and on death.
Where the conditions are met it reduces the value of any gifts of business property made by a person (the ‘transferor’) during lifetime or on death for the purposes of any Inheritance Tax due. If the transferor dies within seven years of making a gift then certain other conditions need to be fulfilled for Business Property Relief to apply.
What Qualifies For The Relief?
There are six categories of ‘relevant business property’:
- A business or an interest in a business
- Unquoted securities of a company, giving control
- Unquoted shares in a company not listed on a recognised stock exchange
- Quoted shares or securities giving control of the company
- Land or buildings, machinery or plant used wholly or mainly for the purposes of a business carried on by a company controlled by the transferor or by a partnership of which he was a partner
- Land or buildings, machinery or plant used wholly or mainly for the purposes of a business carried on by the transferor, and was settled property in which he was then entitled to an interest in possession
What Is The Rate Of Relief?
The 100% rate applies to the categories numbered 1, 2 & 3 above with categories numbered 4, 5 & 6 attracting the lower 50% rate.
How Are The Rates Applied?
The relief is available on the value transferred that is, wholly or in part, attributable to relevant business property. The value is reduced before any claim to any exemption that might make the transfer either wholly exempt or partly exempt. The lower rate generally applies where the asset does not appear on the balance sheet. For example, the premises from which a business trades may be owned by one partner of a partnership rather than by all the partners.
Period Of Ownership
In essence, the transferor must have owned the asset for two years prior to the transfer. There are exceptions to this rule which are outside the scope of this guide.
What Is An Interest In A Business?
‘Business’ is not defined anywhere in the Inheritance Tax legislation which is problematic. It has been confirmed through case law that it is more than just a ‘trade’. The business must be carried on for gain. However, if the business consists of dealing in stocks and shares, securities, land or making or holding investments, the business will not qualify for Business Property Relief.
What Is The Definition Of ‘Control’?
In order to have control of a company the transferor must be able to control the powers of voting on all matters affecting the entire company.
Quoted Or Unquoted Shares
Quoted means quoted or listed on a recognised stock exchange. Unquoted therefore means not listed on a recognised stock exchange. A recognised stock exchange does not include AIM (Alternative Investment Market) shares. AIM shares generally qualify for Business Property Relief provided that they are trading companies who do not trade in any prohibited activities described overleaf.
Land & Buildings, Machinery Or Plant Used In The Business
There are several qualifying conditions:
- The asset must be used wholly or mainly for the purposes of a qualifying business
- The business must be carried on by either:
- A company controlled by the transferor; or
- A partnership of which the transferor was a partner at the time of the transfer
- The asset does not qualify for relief unless the relevant business also qualifies for Business Property Relief
An asset here will not qualify unless used for business purposes throughout the qualifying period required.
The Inheritance Tax legislation does not define machinery or plant. It includes assets treated as such for Income Tax purposes. Plant does not include stock-in-trade.
Land & Buildings, Machinery Or Plant Used In The Business Of A Life Tenant
In order for this category to qualify the transferor must have an “interest in possession”. This is a rarely used category.
Immediate Binding Contract For Sale
Business Property Relief was always intended to save a business from having to be sold to pay any Inheritance Tax. If there is a binding contract for sale, for example an arrangement between partners that on the death of any of them the surviving partners must buy out the deceased partner’s share. The existence of such a contract will destroy the availability of Business Property Relief. This is a complex area upon which professional advice is highly desirable to ensure succession planning can be put in place without destroying the availability of Business Property Relief.
