Death, Taxes, Business

There will be many people who either own a business interest at death or gifted it away to somebody, or to a Trust, within seven years prior to their demise The commonly held belief is that although the value of the business will form part of the deceased’s Estate for inheritance tax (IHT) purposes it will nonetheless attract what is called business property relief (BPR) resulting in no IHT arising on the business asset.

For example:

Tom had run his sole trader printing business for over 20 years, when he sadly passed away. The business is worth £300,000. This should attract 100% BPR resulting in an IHT saving of up to £120,000.

 However, be very careful as the BPR tax legislation has many potential traps, which could be triggered, resulting in a nasty surprise for whoever deals with your Estate upon death. This in turn could mean that there is less to be distributed out to your chosen beneficiaries.

Here are just some of those possible pitfalls:

► If you personally own an asset such as land, buildings or machinery, which you allow the business to use, then only 50% of the value of it will attract BPR. If that business is a company, then you must have control of that firm to even obtain the 50% relief.

► If the business is basically an investment one then no BPR would be due. If a business is a mix of trading and investment then it is important that the business, as a whole, is mainly a trading one. If so, BPR may then possibly be claimed but only against the trading value of the business.

► There is often a practice in place for partners or shareholder directors to enter into a buy and sell agreement, whereby, in the event of one of them dying pre-retirement, the deceased’s representatives are obliged to sell and the survivors to purchase, the deceased’s business interest or shares. If this is deemed by HMRC to be a binding contract for sale then no BPR would be due. A cross option agreement may be more appropriate.

► If you held a business interest for less than two years then potentially no BPR would be due.

► If you gifted away a business interest to someone and died within seven years of doing so, the value of it, as at the date of the gift, would come into your Estate for IHT purposes. To attract BPR, the recipient would normally need to have retained the business interest up to the date you died and the asset must have maintained its business status.

For example:

Carol gifted her longstanding hairdressing salon to her daughter, Louise, who had recently trained as a hairdresser. The business is worth £150,000.

Three years later Carol sadly dies. The salon business is now worth £200,000. As long as Louise has not sold the business, then Carol’s estate should be able to claim BPR on the value of the business as at the date of transfer i.e., £150,000.

If Louise sold the business before Carol’s death it could increase the Estate IHT bill by up to £60,000.

Tip – Where the farming of land comes into the equation, it may be possible to claim BPR on top of Agricultural Property Relief. If you would like us to review your BPR position please do not hesitate to contact us.