Ken Moody gives an overview of keeping the value of a business IHT-free and briefly outlines the business reliefs and how relief may be lost or, perhaps, preserved.
The inheritance tax (IHT) business reliefs are, of course, business property relief (BPR) and agricultural property relief (APR). In circumstances where both may apply, APR takes priority. BPR is the more generic relief, so is of wider relevance and is mainly what I focus on in this article.
'Relevant business property’
BPR applies to ‘relevant business property’ which, for the purposes of this article (see IHTA 1984, s 105 for the wider definition), includes:
- a business or an interest in a business;
- shares in an unquoted company; or
-
any land or building, machinery or plant used wholly or mainly by a company of which the transferor had control or a partnership of which he was a member.
Points 1 and 2 qualify for relief at 100%, while point 3 qualifies for relief at 50%.
Note that the legislation does not specify that the business should be a trade or profession, but it cannot consist ‘wholly or mainly’ of dealing in stocks and shares, securities, land and buildings or ‘making or holding investments’. ‘Wholly or mainly’ could imply greater than 50%, but the test is more nuanced. For example, in the anonymised decision of Farmer and another (executors of Farmer, dec’d) v IRC [1999] SpC 216, the business consisted of farming and letting surplus farm property. APR was available on the value of most of the farmland and farm buildings, and BPR was claimed on the value of the let properties, which was rejected by HMRC. Despite the fact that the lettings were more profitable than the farming, the Special Commissioners found that in the overall context of the business, viewed ‘in the round’, the business consisted mainly of farming.
Excepted assets
However, BPR is not available on the value of any ‘excepted assets’, being assets which were neither used wholly or mainly in the business throughout the two years before the transfer in question nor required for such use in future.
The exclusion mainly applies where large cash deposits (beyond the reasonable requirements of the business) or other ‘financial’ assets such as stocks and shares are held. The value of an interest in a partnership or of shares in a company which is attributable to such assets is excluded from BPR. However, the excepted asset test only overlaps the ‘wholly or mainly’ test in considering the overall context of the business. Otherwise, it is separate and, in a sense, more circumscribed.
The ‘wholly or mainly’ test, perhaps especially, poses a dilemma for many businesses, especially private companies, where surplus profits are accumulated as cash deposits or other liquid assets.
In a partnership scenario, partners’ undrawn profits will have already suffered income tax and might therefore be withdrawn to fund a separate property letting or other investment activity to preserve BPR for the partnership’s core business. Similarly, in a company situation, it may be possible to separate an investment business (not merely assets) such as property rental from the trading business via a demerger to a parallel company.
In both cases, it must be accepted that the value of the separated funds or assets will be fully exposed to IHT directly or indirectly.
Practical tip
The ‘wholly or mainly’ test might, on the one hand, shelter the value of a non-trading activity such as property rental beneath the BPR ‘umbrella’. However, the converse applies, so that if the test is failed, BPR is lost in its entirety. Given that the test may not be clear cut, it is inadvisable to ‘sail too close to the wind’.
