How your clients can use Business Property Relief to cut their tax bill

If your clients are business owners, Business Property Relief can be a valuable Inheritance Tax relief. Assets that qualify for Business Property Relief can have their value reduced by 50% or 100% when calculating Inheritance Tax liability.

Careful planning can help people to save significant amounts of money on their Inheritance Tax bill, so read on to find out more about Business Property Relief and how your clients could benefit.

Business Property Relief is a useful Inheritance Tax relief

Business Property Relief (BPR) is an Inheritance Tax relief that can reduce the value of a business property when it is transferred to another owner.

While this transfer sometimes takes place after the original owner has passed away, assets can also be transferred while the original owner is still alive as long as the recipient keeps them as a going concern until the death of the original owner.

The government introduced BPR in 1976 to help ensure that family-owned businesses could survive after the death of an owner, without having to be broken up to pay an Inheritance Tax liability.

If an asset qualifies for Business Property Relief, its value can be reduced by either 50% or 100% when calculating its Inheritance Tax liability.

It can provide up to 100% relief on certain types of businesses

If your client owns a business or an interest in a business, whether as a sole trader, partnership, or limited company, they can claim relief, provided it’s inherited as a going concern.

Your clients can get 100% relief on:

• Property consisting of a business or interest in a business
• Control holdings of unquoted securities in a company
• Unquoted shares in a company

Your clients can also get 50% relief on:

• Central holdings of quoted shares in a company
• Land, buildings, plant, or equipment used in the business and held in a trust that it has the right to benefit from.

However, your clients will have to have owned the business or asset for at least two years to be eligible to claim relief.

BPR can’t be claimed if the business only generates investment income

It is important to bear in mind that not every business can qualify for BPR. For example, your clients won’t be able to claim BPR on a business that is a non-profit or is not being run on a commercial basis. Neither can they claim it on a business which is being wound up or is subject to a contract for sale.

Furthermore, they can’t claim BPR on a business if over half of their business involves dealing in stocks and shares, securities, land, or buildings, or in the making or holding of investments.

A business which only generates investment income also does not qualify for BPR. This means that letting businesses, property dealing businesses, and serviced office businesses are excluded.

It is also important to consider the nature of the business at the time of the transfer, as this can affect whether the asset qualifies for BPR. For example, if your client owned a business who built houses, but had not built any houses recently and was in the process of selling off its excess land, it would not qualify for BPR.

There are some grey areas, however, in which it is arguable whether or not a business can qualify for BPR. Businesses who manage commercial lettings, furnished lettings (including holiday lettings), or caravan parks can be particularly tricky to assess. This is why there are two tests which are applied:

• Whether the activities constitute a business
• If they do, is the relief precluded because that business was one of ‘wholly or mainly holding investments’?

A good example of this grey area was the 2018 court case of Vigne v. HMRC. Before she passed away, Mrs Vigne had owned a livery stable business on a sizeable area of land, which she let out to owners of horses.

Her representatives successfully argued that her business provided important services to the horses who grazed on the field and that she was not merely in the business of just holding the land as an investment. Because of this, the court found her business to be eligible for BPR and her family did not have to pay Inheritance Tax on its value.

How it can benefit your clients

If your clients are sole traders, partners, or shareholders and have owned the relevant business property for more than two years, then they could benefit from applying for BPR on their business.

This would prevent their families from having to pay a hefty, and potentially unnecessary, tax bill in the event of their death. Given the typical 40% tax rate for Inheritance Tax, successfully applying for BPR could save your clients and their families thousands of pounds.

Get in touch

Business Property Relief can be a valuable Inheritance Tax relief. If you have clients that would benefit from advice in this respect, or you’re interested in how you can work more closely with us, please get in touch. Email enquiries@prosserknowles.co.uk or call 01562 829 222.