Inheritance tax and ensuring tax-efficient succession of the family business

If you are planning to pass on your family business you will need to consider the most tax efficient way of doing so and much will be determined by the availability of Business Property Relief (BPR).

The 100% rate of Business Property Relief (BPR) from Inheritance Tax (IHT) has been with us now for many years – though its continuation cannot be guaranteed for the future. However, not all businesses will qualify - and certain business assets will only attract 50% relief.

The business, whether a sole trade, a partnership or a company, may be handed on, either in stages or in one go, and could be passed on as a lifetime gift, or on death. Assuming of course that there is a ‘ready, willing and able’ recipient of the gift, which can be a major stumbling block in many cases.

If the transfer is on death, Capital Gains Tax (CGT) will not be an issue; instead the recipient will inherit the business at its uplifted value at the date of death. The main concern in this situation is whether the value of the business will be subject to 40% IHT in the Estate of the deceased. Ensuring the availability of BPR will be crucial.

A lifetime gift, however, will be a disposal for CGT, but typically one with no immediate CGT consequences so long as ‘‘hold over” relief is available. Stamp Duty Land Tax (SDLT) should not be forgotten either where land is involved, although if there is no consideration there should be no charge but care should be taken where there is debt secured on any land transferred.

Agriculture is a special type of business which has its own relief from IHT, Agricultural Property Relief (APR), though certain farming assets will attract BPR rather than APR. APR is a subject in its own right, and for this article I am considering only the BPR aspects of succession.

What types of business attract Business Property Relief?

Not all types of business will qualify. Firstly, the business must be carried on for gain; therefore a hobby business will not qualify. Secondly, the business must not be wholly or mainly an investment or dealing business. In this instance the test is a 50% test considering all aspects of the business.

What are the categories of ‘Relevant Business Property’?

The categories of ‘relevant business property’ are as follows:

  • A business or an interest in a business attracts 100% relief
  • Unquoted shareholdings attract 100% relief
  • A controlling holding of quoted shares or securities attract 50% relief
  • Assets owned personally but used in your business, either a company which is controlled, or a partnership of which you are a partner, attract 50% relief
  • Assets used in a business run by a Trust of which you have a life interest, attract 50% relief

It is also worth noting that if there is a contract for sale in place on the business property at the time the relief is being claimed, then the relief will be denied. This can be particularly relevant when considering partnership agreements and pre-emption rights in shareholders agreements.

How long must the business property have been owned to qualify?

You must have owned the business property for at least two years to qualify for relief; it does not need to have qualified throughout the whole period of ownership which can lead to some planning opportunities. There is also some relaxation to the rules for inherited property and replacement property.

How do ‘excepted assets’ restrict Business Property Relief?

The existence of any excepted assets also needs consideration. An excepted asset is one not used wholly or mainly for business purposes throughout the previous two years, or not required for the future business use. An example of such an asset will be ‘surplus cash reserves’ or investments on the balance sheet. The existence of excepted assets will cause a proportionate reduction in the amount of relief available.

To conclude, with a family business the main issue is to ensure that the business is in good shape, in terms of qualifying for relief, before any lifetime gifts are considered and also from time to time during the life of the business so succession on death will be tax efficient. A thorough review of its BPR position should be undertaken to ensure the maximum amount of relief is available with no restrictions. Partnership agreements and shareholders agreements should be reviewed to ensure there are no contracts for sale arising on the death of the partner or shareholder which would deny the availability of relief.

Planning to pass on your family business? Find out more about how we can help you or your business by contacting us today.

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