Case study - how Business Relief saved Mr Jones £250k of Inheritance Tax

Company A – investment income vs. trading income

From our review, we found that Company A had acquired a commercial property, which it was letting to another business to use as a warehouse but they were not trading in it themselves. Because the main income stream for Company A was from the rental of the premises to a third-party tenant, rather than from their own trade, the company did not meet the BR condition that the business must be wholly or mainly trading. 

Due to the business owners’ personal goals, and once they were made aware of how BR could reduce their IHT bill, Company A converted the property into a factory and instead of renting it out, it decided to trade from the premises itself. Company A had not been formally valued, but with the premises held by the company being valued at £500,000, with no loans outstanding, the IHT saving with Business Relief would be at least £200,000. 

Company B – excepted assets

When reviewing Company B, we found that it satisfied all conditions for relief to apply at 100% because it trades itself, but it was clear that the cash held in the company was in excess of the normal level of working capital required. Where the cash held exceeds the working capital required for one year, the excess is generally considered to be an excepted asset. 

BR is restricted to the extent the company value relates to excepted assets and there was an excess of around £150,000 in this case. We worked with our client to devise the most tax effective methods of extracting these funds on an ongoing basis. While it was not possible to remove the full Income Tax charge for Mr Jones, the use of personal allowances, the dividend allowance and the basic rate band meant that the Income Tax charges were kept below 20% on the funds extracted, which was clearly preferable to the 40% IHT rate that would apply on Mr Jones excepted assets.

Overall we reduced Mr Jones’ IHT bill by £260,000 (i.e. £200,000 and £60,000 in relation to company A and B respectively). 

Due to the success of our advice provided to Mr Jones regarding his business assets, he has now engaged us to create a full estate plan for him to protect more of what he earns and ensure he can pass more of his wealth on to his loved ones. 

The availability of Business Relief is just one of the many areas we consider with clients when carrying out an estate planning exercise. With both personal and corporate tax specialists working under one roof, who collaborate on a daily basis, we are very well placed to advise on the tax position for both you and your business, and maximising any relief available.  

It's possible in certain circumstances to apply for non-statutory clearance from HMRC that BR should be available in advance of undertaking a transaction (e.g. the settlement of shares into trust). While HMRC is not bound to the view in its response, it does provide its written opinion of the availability of BR. We can apply for non-statutory BR clearance which, in some scenarios, is preferable to provide a greater level of clarity regarding the treatment of a specific transaction. 

For professional advice tailored to your unique circumstances, please fill out the form below and we’ll be in touch to discuss your requirements and how we can help.