Mark McLaughlin looks at the ‘excepted assets’ rule, which restricts the amount of inheritance tax business property relief available in certain circumstances.
Many business owners will be counting on the availability of business property relief (BPR) when they need it. BPR offers inheritance tax (IHT) relief of 100% (or 50%) on a transfer of value attributable to ‘relevant business property’ such as shares in an owner-managed or family company (which potentially qualify for 100% BPR).
The ‘money box’ trap
However, there is an important restriction in BPR for ‘excepted assets’. This rule is aimed at preventing the exploitation of BPR in respect of non-business assets.
For example, a family trading company owner might desire BPR on their private wealth. They use cash to subscribe for additional shares in the company. Those funds might then be ‘parked’ in the company without being required for the company’s business. Effectively, the company owner would be treating the company as their personal ‘money box’. Without the excepted assets rule, the company owner’s funds would be sheltered from IHT by BPR on the value of their shares.
However, the effect of the excepted assets rule is broadly that the value of the shares on which BPR is available would be subject to restriction by the value attributable to the surplus cash (and any other non-business assets). In other words, only that part of the share value which relates to relevant business property is reduced by BPR; the other part relating to the excepted assets is not reduced by BPR and is therefore chargeable to IHT as normal.
Is it ‘excepted’?
An asset is ‘excepted’ for BPR purposes broadly if it is neither:
- used wholly or mainly for business purposes for at least the last two years of ownership (but see below); nor
-
required for future business use.
These tests are commonly known as the ‘past use’ and ‘future use’ tests.
HMRC’s guidance on excepted assets in the Inheritance Tax manual (at IHTM25341 and IHTM25351) confusingly indicates that for an asset to escape being excepted, it must not be caught by either the ‘past use’ or ‘future use’ test. However, HMRC’s guidance (which does not carry the force of law) does not seem to accord with the legislation, which indicates that an asset only needs to escape being ‘caught’ by one of the bullet point conditions above.
For the purposes of the ‘past use’ test, the two-year relevant period is broadly the period immediately before the transfer of value during which the asset was owned by the company. Thus, if the asset has not been owned for the normal two-year period, the actual period of ownership is considered instead.
In addition, the ‘future use’ requirement needs to be considered at the time of the IHT event (i.e., in the above example, on the company owner’s death). The future use must clearly be contemplated, and there should be evidence of some positive decision or firm intention.
Practical tip
If an asset would otherwise be subject to the excepted asset rule, consideration should be given to whether it would be possible to improve the position. For example, it might be worth looking at the possibility of using the asset for a business purpose in such a way that it forms part of the company’s existing trade, or alternatively, it forms part of a separate eligible business.
