Business Property Relief (BPR), formally referred to as Business Relief, can reduce the Inheritance Tax (IHT) bill on your business assets by either 50% or 100% depending on the asset. In this case study, we explore steps that can be taken during lifetime, to help maximise relief available.

Our experts reviewed Mr Jones' current tax position and the extent to which BPR would apply, and then identified the actions that could be taken to maximise the relief. This led to an increase in the amount of relief available and a reduction of his IHT bill by over £250,000.

This article also highlights:

• The use of assets held by a company/the activity of the company and how this impacts the availability of the relief.

• How excepted assets impact the availability of BPR.

Case study: Mr Jones

Mr Jones came to us looking for advice with a particular focus on the business interests he holds. He’s not resident in the UK but has a UK domicile of origin. His wife, Mrs Jones, is not UK domiciled and their plans for the future were fluid. Regardless of his domicile position, Mr Jones’ shareholdings in the UK limited companies would always potentially fall into the UK IHT net, because they are UK situs assets.

Mr Jones had a 50% interest in two family-owned companies – for this article, we’ll call them Company A and Company B.

Our personal and corporate tax experts reviewed Mr Jones’ businesses and the balance sheets to see if they met the qualifying conditions for Business Property Relief, and if any assets used in the businesses (but owned by Mr Jones personally) qualified. We also reviewed Mr Jones’ current position and IHT exposure from a personal perspective and advised on the best estate planning approach tailored to his unique circumstances, to minimise his tax bill wherever possible.

BPR is available on shares in unquoted trading companies at 100%, and the companies in question for Mr Jones were both unlisted. Business Property Relief, at a rate of 50%, is also available on land, buildings and machinery owned personally by the transferor and used in a business they control. In this case, the companies both held the land and buildings. For BPR to apply, you must hold the asset for at least two years prior to transfer (although special rules apply to replacement property, assets received from a spouse and successive transfers). Mr Jones had held his shares for over 10 years. Therefore, the ownership condition was clearly met.

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 BPR 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 BPR 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 Property 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.

BPR 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.

Speak to an expert

The availability of Business Property 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 BPR. We can apply for non-statutory BPR 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.