Inheritance tax and business property relief
You probably know that inheritance tax is due at 40% on your estate after death over and above any nil rate band available.
You may know that business property relief can exempt trading assets from that tax.
What you may not fully understand are the conditions for business property relief (BPR), and this could lead to you missing out on a valuable relief.
If we look at the availability of BPR on shares, they will qualify for BPR if 51% of the company’s activities are trading and not holding investments. This is a cliff test – if you do not meet it, BPR is not available at all, if you do meet it BPR is available at 100%.
However, this is not the end of the matter.
The 100% relief is applied to the value of the company attributable to the trade and not the investments. So, if the company just meets the trading test and gets 100% relief, this might only be on half the value of the company, sometimes even less where the company holds a valuable investment asset such as a property.
What can you do about it?
The first step is to work out how much BPR is worth to you as things stand.
· Review your accounts – what assets are part of your trade, which assets are investments? How much are they worth?
· Do you have large cash balances?
· What are your future aims for the business?
Although the test for BPR is whether the company is 51% trading, there are a variety of ways that percentage can be calculated – balance sheet assets, turnover, time spent in the business. And sometimes these approaches will give a different answer. A tax adviser can guide you as to which is the relevant test for your circumstances, as well as suggest how to improve matters across the board. Sometimes it is simply a question of recording time spent in the business better, or bringing property into use in the trade again.
Large cash balances held in the business can reduce BPR if they are viewed as investment assets.
Sometimes cash balances are retained for business purposes such as an acquisition of a new property, as working capital, to pay creditors and get reduced prices, etc. If you do not record the reasoning behind your cash balances, HMRC will assume they are not part of the trade.
An adviser can assess what cash balances are acceptable and advise on how to document the decisions taken.
If the cash is not required in the business, then it may be worth considering other uses and / or distribution to shareholders and again tax advice would help make this as tax efficient as possible.
If you are considering retiring, a sale or passing the company on to your children, then it is vital to speak to an adviser as early in the process as possible to allow us the best chance to restructure the business to get maximum business reliefs. There are capital gains tax reliefs available for trading businesses, and although these are not the same tests as for BPR, the issues they raise are very similar.
Whatever you want to do with your business in the future, early planning will allow you to face the future in the best possible way.
Churchill Tax Advisers