Inheritance tax is a tax charge usually levied on a deceased person’s assets, with a tax rate ordinarily of 40%. There are various allowances available to help mitigate the impact of this tax.
Business Property Relief (BPR) is designed to prevent families having to sell their businesses to pay the inheritance tax due on the death of an owner. Business Property Relief can save families up to 100% of the inheritance tax potentially chargeable against their company assets.
Unquoted shares held in a family trading company for a period of two years or more could attract this relief, providing the company does not “wholly or mainly” deal with investments such as renting, buying or selling properties etc.
BPR is determined on an ‘all or nothing’ basis – the shareholding either qualifies in full (subject to the ‘excepted assets’ exclusion) or it does not. It is therefore possible for a company’s shares to qualify for 100% BPR provided it is not mainly carrying out an investment business, ie, it is mainly trading. Thus, a small or incidental investment activity run alongside a predominant trading one would not adversely affect a claim for BPR.
The excepted assets exclusion is an anti-avoidance provision which seeks to prevent ‘taxable’ personal assets being ‘sheltered’ from IHT by being held within a BPR-eligible company – this might include (for example) a holiday home which is held within the company for the owner-manager’s private use. The excepted assets restriction can also prevent BPR being given on ‘excess’ cash reserves being built up within a company unless it can be shown that the ash is earmarked for some business use.
BPR can be lost if shares are subject to a binding contract to sell at the date of the owner’s death. Such a contract can sometimes be included in a shareholders’ agreement without consideration having being given to its tax disadvantage. Cross options or “put and call” options are generally not considered to constitute a binding contract for sale.
Furthermore, careful thought needs to be given about business succession when preparing a Will. Passing assets which attract BPR to an already exempt beneficiary, such as a spouse, could potentially waste the relief. Passing the exempt assets however to children or a family trust could be a highly successful way of mitigating tax for the family.
Alexandra Milton, Asset & Wealth Protection and Ian McDonald, Corporate & Commercial work closely together to assist their clients in mitigating the impact of inheritance tax when dealing with family companies and succession issues.
For further advice on the above topics, please call us on 01483 543210 or alternatively email firstname.lastname@example.org