Mark McLaughlin looks at how inheritance tax business property relief might be recycled by spouses or civil partners.
Business property relief (BPR) is an important and valuable relief from inheritance tax (IHT). BPR broadly reduces the value of eligible business or business property at rates of 100% or 50%.
Certain conditions must be satisfied for BPR to be available, including as to the type of business carried on and the length of ownership of the business or business interest. The requirements for an eligible BPR claim are beyond the scope of this article, but BPR can apply to lifetime transfers of relevant business property in an individual’s death estate.
Use it or lose it?
For married couples (or civil partners), if (for example) a spouse’s will leaves family trading company shares eligible for BPR at 100% to the surviving spouse, this will generally result in BPR being wasted on the first death. This is because the legacy will normally be subject to the IHT spouse exemption, so there is no IHT liability in any event (although the exemption may be restricted if the recipient spouse is non-UK domiciled).
To prevent the loss of BPR in this example, consideration might be given to ensuring that on the first death, the family company shares pass to non-exempt beneficiaries, such as into a discretionary trust for the surviving spouse and family members. There would still be no IHT payable on the first spouse’s death, as the legacy to the discretionary trust is subject to BPR at 100%.
A discretionary trust is generally liable to IHT charges, mainly on ten-year anniversaries and when trust assets are appointed to beneficiaries. The IHT rates for trusts are generally lower than for individuals (i.e., a maximum IHT liability of 6% for the trust every ten years, as opposed to 20% for chargeable lifetime transfers by individuals, or 40% on death). However, the family company shares will once again become eligible for BPR if held for at least two years. In the meantime, the surviving spouse can potentially benefit from the trust as a discretionary beneficiary.
Second bite of the cherry?
In some circumstances, it may be possible for BPR to be utilised a second time in respect of the same business property when looked at in the context of the family unit, such as a married couple.
Returning to the above example, suppose the shares were left to a discretionary trust on the first death. The survivor continued to be involved in the family business and bought the discretionary trust’s shares from the trustees (assumed here to be their market value on death). No capital gains tax (CGT) is payable by the trustees (as there was a CGT-free uplift in the value of the shares on death). However, the surviving spouse will be liable to stamp duty at 0.5% of their purchase price.
After at least two years following the acquisition of the shares from the trustees (and assuming BPR at 100% is still available on the shares), the shares will be eligible for BPR again. As indicated, the trustees of the discretionary trust may decide to benefit the surviving spouse by making trust distributions.
Practical tip
This IHT planning (sometimes called ‘BPR recycling’) must come with a ‘health warning’. HMRC may challenge a BPR recycling arrangement, particularly if it seems artificial. It should also be considered whether the arrangements are notifiable to HMRC under the disclosure of tax avoidance schemes rules.
