Inheritance Tax is a tax imposed on the property, money, and possessions (known as the ‘estate’) of someone who has passed away. It applies to the value of an estate above a certain threshold – currently £325,000 – with rates varying depending on the relationship between the person who has died and the beneficiary.
Business Relief (BR), also known as Business Property Relief (BPR), is designed to support the continuity of family-owned and other qualifying businesses by giving relief from IHT on certain business assets. Here we take a look at how it works.
Business Relief was introduced in 1976 to encourage entrepreneurship and the growth of small and medium-sized enterprises (SMEs). It allows someone to pass on their qualifying assets during their lifetime as a gift, or upon death, either at a reduced rate or free from Inheritance Tax altogether.
The relief also aims to stop healthy businesses having to be sold simply because the owner needs to pay their IHT bill.
Who’s eligible to claim Business Relief for Inheritance Tax?
The asset must be a qualifying business interest. This could be shares in an unlisted company, or an interest in a partnership business or as a sole trader for example. The business also needs to be actually trading, and not mainly involved in activities like property investment or development.
Length of Ownership
The business interest needs to have existed for at least 2 years before it will qualify for Business Relief. There are some exceptions for certain types of assets, such as AIM-listed shares, where the 2-year ownership rule doesn’t apply.
The business must be mainly involved in trading activities rather than non-trading activities like investment or holding of surplus cash. HMRC has given guidelines to differentiate between trading and non-trading activities, and of course, our team can help too.
Some assets do not qualify for Business Relief, including those used for investment purposes, stocks, and shares not listed on a recognised stock exchange, and assets that are subject to a binding contract for sale.
How much is Business Relief for IHT?
The percentage rate of Business Relief that’s available for Inheritance Tax depends on the type of asset, and how long it has been owned for.
Generally, qualifying business assets attract either 50% or 100% relief.
For instance, shares in an unlisted trading company or a controlling interest in a trading partnership usually qualify for 100% relief, while other assets, like shares in a listed company, may qualify for 50% relief.
How do I apply for Business Relief?
Executors or administrators who are dealing with the estate of the person who has died will need to submit a claim for Business Relief as part of the Inheritance Tax return. The process usually involves giving detailed information about the business’s assets, including valuations, ownership history and evidence of the business’s trading activities.
HMRC looks at each claim on a case-by-case basis to make sure the asset is eligible for the relief and that all the information given is accurate. Taking professional advice can help you to make sure it all goes smoothly.
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Why is estate planning important?
Business Relief is important in estate planning, particularly if you have quite a few business interests. By reducing the impact of IHT on business assets, Business Relief can make it much easier to transfer wealth from one generation to the next, whilst keeping a business ‘in the family’.
This type of relief can be really useful for entrepreneurs and investors who want to optimise their tax position during their lifetime. By making use of lifetime gifts and being smart about how your tax affairs are structured, it’s possible to use Business Relief to cut your IHT liability and maximise the value of your estate ready to pass on.
What else should I consider?
While Business Relief offers significant benefits for estate planning, there are certain challenges and things to think about. For example:
Complexity: The rules around Business Relief can be complex with eligibility criteria varying a bit, depending on the nature of the business assets.
Changes in legislation: UK tax law changes fairly often, and any updates to tax legislation could affect your claim for Business Relief in the future. You’ll therefore need to stay in the loop about any changes so you can update your estate planning as needed.
Valuation issues: Valuing business assets in order to claim Business Relief can be tricky, particularly for unlisted companies or businesses with more complex legal structures. But making sure your business valuation is accurate is really important, otherwise you could end up in a lengthy (and costly) dispute with HMRC.
Don’t go it alone
As with most things in life, the devil is in the detail. Business Relief is great for bringing real tax advantages for anyone with business assets they want to pass on when they’re gone. However, as you can see, you need to be clear on what you’re doing, not only to maximise the benefit but to stay on the right side of HMRC too.
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