Sarah Bradford explains the conditions to be met for a business to qualify for 100% business property relief for inheritance tax purposes.
Business property relief (BPR) is a valuable inheritance tax (IHT) relief, allowing certain types of business asset to be passed on IHT-free. There is also a 50% rate of relief for other eligible business assets that do not qualify for the 100% rate.
However, as with all reliefs, its availability is contingent on certain conditions being met, as only the ‘right’ type of business assets will qualify for the relief.
Although the relief was introduced to enable family businesses to be passed on IHT free, the scope of the relief has been widened since it was first introduced.
Nature of the relief
There are two rates of BPR – 100% and 50%. The relief is available on both lifetime and death transfers.
Where all or part of the value transferred is relevant business property, the value attributable to that property is reduced by the appropriate rate of relief.
The ‘right’ property
BPR is only available in respect of ‘relevant business property’. To qualify as relevant business property, the property transferred must be one of the following:
- property consisting of a business or an interest in a business;
- securities of a company which are unquoted and which, either alone or with other unquoted securities owned by the transferor, gave the transferor control of the company immediately before the transfer;
- any unquoted shares in a company;
- shares or securities in a company which are quoted and which, either alone or with other such shares and securities owned by the transferor, gave the transferor control of the company immediately before the transfer;
- any land or building, machinery or plant which immediately before the transfer was used wholly or mainly for the purposes of a business carried on by a company of which the transferor had control, or by a partnership in which the transferor was then a partner; or
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any land or building, machinery or plant which immediately before the transfer was used wholly or mainly for the purposes of a business carried on by the transferor and was settled property in which the transferor was then beneficially entitled to an interest in possession.
Two-year rule
To benefit from the relief, the property must generally have been used by the transferor throughout the two years immediately preceding the transfer of value.
Property that does not pass this minimum period of ownership test is generally not relevant business property – but see ‘replacement property’ below.
The ‘wrong’ type of business
Even if the property in question is of a type listed above, BPR is not available if the company:
- mainly deals with securities, stocks, shares, land or buildings, or in making or holding investments;
- is a not-for-profit organisation;
- is being sold, unless the sale is to a company that will carry on the business and the estate will mainly be paid in shares in that company; or
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is being wound up unless this is part of a process to allow the business of the company to continue.
BPR is also unavailable on an asset that also qualifies for agricultural property relief, or where the asset was not used mainly in the business in the two years prior to the transfer or if the asset is not needed for future use in the business.
However, if part of a non-qualifying asset is used in a business, BPR may be available in respect of that part. This would be the case, for example, where a property comprises a shop, plus rooms above occupied as the proprietor’s home. The rooms used for the shop may qualify for BPR, but the rooms used as a home will not.
BPR may also be available on the transfer of agricultural property, such as farmland, farm buildings or equipment, which is not eligible for agricultural property relief.
Replacement assets
Replacement business assets may also qualify for the relief, if certain conditions are satisfied.
Broadly, the new assets must replace property which, together with the property they replaced, were owned by the transferor in total for at least two years in the five years preceding the transfer; and had the transfer occurred immediately before the replacement, if the property which was replaced would have been relevant business property.
Business assets qualifying for 100% relief
BPR is available at 100% on relevant business property comprising:
- property consisting of a business or an interest in a business;
- securities of a company which are unquoted and which, either alone or with other unquoted securities owned by the transferor, gave the transferor control of the company immediately before the transfer; and
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any unquoted shares in a company,
which has been owned by the transferor throughout the two years immediately preceding the transfer.
Business assets qualifying for 50% relief
Relief is given at the 50% rate for relevant business property that does not qualify for 100% relief, i.e.:
- shares or securities in a company which are quoted and which, either alone or with other such shares and securities owned by the transferor, gave the transferor control of the company immediately before the transfer;
- any land or building, machinery or plant which immediately before the transfer was used wholly or mainly for the purposes of a business carried on by a company of which the transferor had control or by a partnership in which the transferor was then a partner; and
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any land or building, machinery or plant which, immediately before the transfer, was used wholly or mainly for the purposes of a business carried on by the transferor and was settled property in which the transferor was then beneficially entitled to an interest in possession.
As with relief at 100%, the 50% relief is contingent on the transferor having owned the property for a minimum of two years immediately prior to the transfer.
BPR on lifetime gifts
BPR is available on lifetime gifts as well as those made on the transferor’s death. This can be useful from a business planning perspective, allowing shares and assets to be transferred when the time is right to pass the business on, rather than having to wait until the transferor dies. However, there are conditions.
The relief is only available on a lifetime gift of business property or a business asset if the recipient keeps the business going as a going concern until the death of the transferor. However, this is subject to the seven-year rule. A lifetime gift is a potentially exempt transfer. The gift falls out of account for IHT purposes if the transferor survives for more than seven years from the date of the gift. Thus, if relevant business property is gifted more than seven years before the transferor dies, the gift does not count as part of the estate for IHT purposes.
Where the gift is made within the seven years preceding the transferor’s death, it will form part of the estate. If additional tax is due on the transferor’s death, BPR will generally apply if the property remains relevant business property. If the original transferee has disposed of the property or if it no longer qualifies as relevant business property, the relief may be lost.
Transfers of death
BPR will reduce the value of relevant business property passed on in a will or under the intestacy provisions by 100% or by 50%, as applicable. The relief should be claimed by the executor of the will or the administrator of the estate when valuing the estate for IHT purposes. They will need to complete:
- Form IHT400: inheritance tax account; and
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Schedule IHT413: business or partnership interests.
Where relief is due on business assets at the 50% rate, those assets should be valued at their market value at the time of death.
Practical tip
BPR allows a business to be passed down through the generations free of IHT. However, it is vital to plan ahead to ensure that the associated conditions are met and this valuable relief is not lost.
