Maximising Business Property Relief

Published by Dipesh Galaiya on 13 March 2024

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At the start of 2022, there were estimated to be 5.5 million private sector businesses in the UK, of which 5.47 million businesses were in the small category (i.e. with 0 to 49 employees) – the very backbone of the British economy.

But are these business owners maximising tax allowances available to them to ensure smooth succession to the next generation?

The nil rate band (the level below which the Inheritance Tax is charged at 0%) has been frozen at £325,000 per person since 2009, and asset valuations (e.g. property prices and values of other investments) have generally risen – this has resulted in a marked increase in the IHT collected by HMRC to peak at £6.3bn for the period April 2023 to January 2024.

Therefore, it’s important to consider any IHT reliefs available, one of them being Business Property Relief (BPR). It was introduced so after the death of the business owner, the family-owned business could survive as a trading entity without having to be sold or broken-up to pay an IHT liability.

BPR relief is given as a reduction in the value of property on which IHT is charged, and this is available on the transfer of business property either on the death or on a transfer during the donor’s lifetime. The reduction will be:

  • at 50% for business assets held personally but used wholly or mainly for the purposes of the business carried on by one’s company or partnership; or
  • at 100% for a business (e.g. sole trader or partnership) or for shares in unquoted trading companies (which includes trading companies quoted on the AIM market).

To qualify for this relief, the business asset must be held for at least 2 years continuously before the transfer, and the asset must be ‘relevant business property’ in that it should be wholly or mainly trading.

A word of caution – if the business or the company carries out activities which are wholly or mainly  dealing in securities, stocks and shares, land and buildings or making / holding investments then BPR will not be available. ‘Wholly or mainly’ means more than 50% and to ascertain that, it is necessary to look at the business as a whole (and in the round) along with the activities it is actually engaged in.

BPR is a very powerful relief but this can be lost if the business asset is sold or is in the process of being sold by virtue of entering into a ‘binding contract for sale’.

We encourage business owners to actively consider succession planning strategy(ies) such as getting the next generation involved in the business at the right stage with a view to passing the baton over. When they feel the time is right, they can consider gifting business assets to their heirs. This can help manage IHT in the longer term but also preserve cashflow by claiming holdover relief to defer the Capital Gains Tax on that transfer.

Some business owners may be concerned by the risks of making outright gifts such as loss of control over the business and the potential for the asset(s) being ‘squandered away’ or lost through marital failure of their heir(s). In such cases, they could turn to Trusts as an effective alternative to maintain control over the business asset whilst managing IHT for the longer term with the over-riding objective to safeguard this asset for the long term benefit of the family. Assuming the business asset qualifies for 100% BPR, it can enter the Trust at a £nil IHT charge on set-up.

You can learn more by reading this article, which explains the use of Trusts.

Where a business is owned by a husband-and-wife, they could leave their relevant share of the business asset to a Trust under their Will (rather than to the surviving spouse) – this enables them to ‘bank in the BPR relief’ whilst it is available without triggering an adverse IHT charge.

This is a complex area but with careful planning, you can help preserve the business asset within the family (or bank in the BPR) for the long-term benefit whilst maintaining control and managing the associated tax costs.

We have a team of qualified solicitors who have considerable experience in drafting Wills which deal with business assets as well as preparing lifetime trust documents which can provide for the transfer of business assets to a trust.  At the same time as considering Wills and estate planning generally, people should think about lasting powers of attorney (LPA).  An LPA is a legal document which allows you to choose who you want to make decisions on your behalf if you lack capacity to make them yourself.  There are two types of LPA – one which allows your attorney to deal with your property and financial affairs and the other which allows your attorney to make decisions on your behalf in connection with your health care including medical treatment decisions and decisions as to whether to consent to life sustaining treatment.

If you would like further information, please get in touch.

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