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15 min read 31 Mar 23
Inheritance tax (IHT) legislation (IHTA 1984) provides relief for certain types of business or business property included in either a lifetime transfer or the deceased’s death estate. Relief is available for business property anywhere in the world.
For deaths and transfers, on or after 6 April 1996, the categories of property which are capable of qualifying as relevant business property are broadly as follows with rate of relief:
All statutory references are to IHTA 1984.
The general rule is that property does not qualify for business property relief unless it was owned by the transferor throughout the two years immediately preceding the transfer (S106). The nature of the business carried on needn’t be the same throughout the two-year period, but there must have been a business throughout that period.
The general rule is relaxed in three situations:
Where the deceased / transferor became entitled to property on the death of another person, he / she is treated as having owned it from the date of the other person's death (S108(a)). Where the deceased / transferor became entitled to property on the death of their spouse or civil partner, he / she ‘inherits’ the ownership period of the spouse or civil partner irrespective of how long they had been married (S108(b)).
In these circumstances, there are additional conditions (S113A & 113B) for deciding whether business property relief is due where the transferor dies within seven years. These conditions are designed to deny business property relief in connection with charges arising on the transferor’s death if, broadly, the recipient has disposed of the property without replacement or, if it no longer qualifies.
The conditions therefore affect the value transferred by a PET, and the additional tax payable on a CLT if the transferor dies within seven years.
The rate of relief (100% or 50%) and the value on which it is given are determined by reference to the original gift and the position at that time. If the rate of relief has changed, then the rate at date of death applies.
The conditions to be satisfied are that the original property must:
If the recipient has replaced the gifted property with other business property then that is allowable.
If the conditions are only satisfied in relation to a part of the gifted property, then there needs to be a proportionate reduction.
James made a PET of £200,000 comprising shares in a private trading company to Karen. Before he dies, Karen sells one-half of the holding for £40,000. Business property relief is available on £100,000.
Where the conditions are not satisfied at all, the consequences depend on whether the transfer is a failed PET or a CLT. With a failed PET, the value transferred by the PET is ascertained on the basis of no business property relief. With a CLT, the additional tax chargeable on death is calculated on the basis of no business property relief.
The meaning of ‘business’ is not defined for IHT purposes, so it has its ordinary meaning, which is a trade or profession carried on for gain.
Business “includes a business carried on in the exercise of a profession or vocation, but does not include a business carried on otherwise than for gain” (S103(3)). This therefore excludes ‘hobby businesses’.
The definition therefore includes property such as a sole trader's business and a partner's share in a partnership carrying on a business. The property must consist of a business as a whole or a share or interest in such a business. Transfers of individual assets are not included, whether they are comprised in the business or just used in the business.
The current definition in S105 is that unquoted means not quoted on a recognised stock exchange with shares dealt on the Alternative Investment Market being unquoted for these purposes.
Business property relief applies to any land, buildings, machinery or plant, which immediately before the transfer was used wholly or mainly for the purposes of a business carried on by either a company the transferor then controlled, or a partnership of which the transferor was then a partner.
It is not uncommon for a sole trader to incorporate but, for example, to personally retain the business premises. This scenario could therefore give rise to 50% business property relief on the premises.
Business property relief is not due where the business, or the business carried on by the company, consists wholly or mainly of:
These types of businesses are not relevant business property and so do not attract business property relief. It should be noted however that this exclusion does not generally apply to shares in a holding company. In other words, shares in a holding company which owns share in a trading subsidiary would, in principle, benefit from business property relief.
Moreover, relief is not denied for shares in a genuine building and construction company holding a number of properties as stock. It is important to consider the nature of the business at the time of the transfer (a business which started as a house builder but at the time of the transfer had not recently built any houses and was selling off its land bank wouldn’t qualify for business property relief).
Businesses concerned with caravan sites, furnished lettings, furnished holiday lettings, and commercial letting can be particularly problematic. The two tests that need to be applied are:
The phrase ‘wholly or mainly’ doesn’t simply refer to the income, or the capital or the activities of the business. All aspects of the business must be considered. In deciding whether a business falls within S105(3), consideration will be given to preponderant activities, assets and sources of income or gains at the time of the transfer and over a reasonable period leading up to it. Each company has to be looked at in the round. HMRC does however state:
Shares & Assets valuations Manual SVM111150
Letting of small industrial units
Landed estate with both farming & letting activities
Letting furnished flats
Letting of seaside bungalow as holiday accommodation
Letting of caravans
Letting of small office units in a commercial building
Letting units in a business centre
S112 prevents taxpayers from getting the benefit of business property relief for private assets by confining the relief to assets needed for the business.
The value of any ‘excepted assets’ is ignored for the purposes of business property relief. For an asset to avoid being ‘excepted’ it must pass one of two tests which are broadly as follows:
An asset used wholly or mainly for the personal benefit of the transferor (or of a connected person) would not be an asset “used wholly or mainly for the purposes of the business”.
The ‘future use’ test was considered in Barclays Bank Trust Co Ltd v CIR SpC 158.
A lady died holding half the shares in a company. Her husband held the other half. The company’s trade was the sale of bathroom and kitchen fittings, mainly to ‘trade’ customers.
The company‘s turnover at the time of the lady‘s death was approximately £600,000. It held £450,000 in ‘cash’ invested for periods of up to 30 days. HMRC accepted that the company needed £150,000 but determined that £300,000 was an ‘excepted’ asset.
The Special Commissioner posed the question as follows, at para. 10 of his decision:
Two points are relevant:
In January 2014, the Institute of Charted Accountants in England & Wales (ICAEW) issued a Technical Release containing guidance agreed with HMRC regarding surplus cash.
The ICAEW reflected that many businesses within the UK are retaining increased cash buffers in case of any further downturn in trade, and accordingly confirmation was sought from HMRC if it would look favourably on surplus cash held in this regard. The response of HMRC was as follows:
The rule excluding excepted assets is relaxed in the case of land or a building where only part is used exclusively for the purposes of the business. In these circumstances an apportionment takes place between the two parts (S112(4)). For example, apportionment would take place where the deceased owned a three-storey building but only used the ground floor as a shop. Where a mortgage is secured on the property, then unless it is secured on a particular part of the building it should be apportioned rateably between the relevant parts.
Property falling under the gifts with reservation (GWR) rules has to satisfy two conditions to qualify for business property relief:
Agricultural property relief (APR) is given in priority to business property relief, and therefore it is not possible to claim business property relief on a business asset if the asset also qualifies for APR.
It is common for partners and shareholders (in private companies) to enter into reciprocal agreements so that when one person dies, the surviving business ‘associates’ may purchase the deceased’s business interest funded by the proceeds from life assurance policies. If there is a binding agreement that the personal representatives are required to sell the business interest and the survivors are obliged to purchase, then no business property relief will be available. The overarching reason relief is denied is that effectively the deceased has simply bequeathed cash rather than a business interest.
This problem is easily overcome with a double option agreement where the personal representatives have the option to require the survivors to purchase the business interest and correspondingly, the survivors have the option to require the personal representatives to sell. Accordingly, at point of death there is no binding agreement in place and business property relief is not denied.
It’s no longer possible to reduce the value of an estate for IHT purposes by securing a loan on it where the loan is then used to acquire property qualifying for business property relief (S162B(1)).
Where money is borrowed to acquire assets qualifying for business property relief, then the liability firstly reduces the value of the assets that qualify for relief. This is the case even if the liability is actually secured against other assets in view. Business property relief is then given against the net value of the asset after deduction of the liability. Any remaining value of the liability may then be set against any other assets that are chargeable to tax, as long as the deduction is allowed (S175A).
Gordon borrows £450,000 secured against his house and uses these funds to acquire AIM shares. When he dies five years later, the shares are worth £575,000 and qualify for business property relief. The rest of his estate is worth £1.5m. At the date of death the liability is taken to reduce the value of the AIM shares that can qualify for business property relief from £575,000 to £125,000. Business property relief applies to that value.
The total estate, including the AIM shares is £2,075,000 (£1.5m plus £575,000).
This is reduced by business property relief of £125,000 and the liability of £450,000.
The value of the chargeable estate is £1.5m.
Planning with business property relief is a specialist area. However, below is a brief overview of the simpler planning aspects.
Consider an individual who owns shares in a private trading company qualifying for business property relief. If the individual dies, then there will be no IHT on those shares and there will be an uplift in the capital gains tax (CGT) base cost to market value at death. Therefore assuming no changes in legislation, the business property can be passed on free of tax. Consideration may be given to leaving this property to a discretionary will trust to crystallise the business property relief rather than to an exempt spouse or civil partner. The business property should be the subject of a specific gift otherwise the relief will be apportioned over the whole estate including the spouse / civil partner exempt portion.
There may of course be non-tax reasons why it may not be desirable for business owners to retain the business property until time of death.
An individual with shares in a private trading company qualifying for business property relief could transfer those shares into a discretionary trust with no initial IHT charge. That might be done in anticipation of a sale of the shares with the proceeds then subject to the relevant property regime rather than being inside an individual’s estate for IHT purposes. CGT implications would need to be considered. In addition, individuals would need to be mindful of the potential impact of the settlor interested trust provisions (income tax) and gift with reservation rules (IHT).
Alternative Investment Market (AIM) shares can now potentially qualify for the stocks and shares ISA, meaning IHT business property relief (BPR) may be available on death of the investor.
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