What is Business Relief?
Business Relief (BR), formerly Business Property Relief, has been an established piece of Inheritance Tax (IHT) legislation since 1976. It enables qualifying assets that have been owned for at least two years to be passed on free from IHT. Assets that qualify for Business Relief include agricultural land, forestry, trading businesses and certain qualifying companies quoted on AiM.
IHT planning using Business Relief enables assets to obtain relief more timely than would be possible through trusts or gifts – and, perhaps most importantly, this is done in the investor’s name, so there is no loss of control over the capital.
All of the business activities offered through our IHT Services are carefully selected to ensure that they qualify for Business Relief, and therefore should obtain full relief from IHT after two years.
Business Relief as part of an estate planning strategy
Key benefits of investing in BR qualifying companies or assets:
Avoids giving away money
Investors can give their money away during their lifetime to reduce the value of their estate, but it’s not an option that many people feel comfortable with. However, with a Business Relief qualifying asset, investors keep hold of their wealth – as the shares are held in their name.
Gives the planned inheritance a chance to grow
Investing in qualifying assets means that investments have the potential to increase in value. As with any investment, there is risk – and investors could lose some or all of their money.
Becomes free from IHT more quickly
Some people are put off by traditional estate planning strategies, such as making gifts or putting money in trust, as these typically take seven years before becoming fully exempt from IHT. A Business Relief qualifying investment enables the asset to obtain 100% relief from IHT after a holding period of just two years, as long as they are held at the time of death.
Guide to Business Relief
What constitutes relevant Business Property and the relief available?
- A business or an interest in a business (100% relief)
- Unlisted shares including shares that are quoted on AIM (100% relief)
- A holding of shares or securities that give you control of a company that are fully listed on a recognised stock exchange (50% relief)
- Any land, buildings, machinery or plant used wholly or mainly for the purposes of the business carried on by a company or partnership (50% relief)
- Any land, buildings, machinery or plant used in the business and held in trust that you have the right to benefit from (50% relief)
The business has to be carried on by the relevant person, or the company or partnership carrying on the relevant business has to be controlled by the relevant person. An investment in an Enterprise Investment Scheme (EIS) can also obtain relief from IHT under BR. The investor would benefit from the relief after holding the EIS investment for at least two years providing the scheme meets the BR trading criteria. An EIS also offers generous income tax and capital gains tax relief to investors.
BR is not available in respect of business that:
- Is not carried on for gain (i.e. not for profit or not on a commercial basis);
- Is engaged wholly or mainly in dealing in securities, stocks or shares, land or buildings or in the making or holding of investments;
- Is being sold, unless the sale is to a company that will carry on the business and the estate will be paid mainly in shares of that company; and
- Is being wound up, unless this is part of a process to allow the business to carry on.
In considering whether the business is wholly or mainly engaged to obtain the relief unfortunately no strict test applies. The courts will consider a number of factors including:
- The overall context of the business;
- The activities over a reasonable period;
- The turnover and profitability of all the different activities;
- The activities of the directors and employees and how time is spent;
- The capital values of assets; and
- The level of cash in the business.
If IHT is due and the business property is not covered, you may be able to pay the tax by installments on:
- Certain shares and securities;
- The net value of a business or an interest in a business, including a profession or vocation, carried on for gain (this does not include individual assets of a business, which are distinct from the business as a whole).
- The relevant business property has to have been held for at least two years to qualify;
- Any relevant business property sold from the portfolio must be replaced within three years; and
- The relevant business property must be held at the date of death for full relief from IHT. BR is not restricted to businesses situated in the UK and therefore applies to business interests anywhere in the world.
What are the conditions for Replacement Property within Business Relief?
Where the original relevant business property was disposed of before the transferor’s death and the proceeds were used to buy replacement business property, BR is not necessarily lost.
In order to still qualify for BR, the whole of the sale proceeds must have been used to purchase the replacement business property, and both the sale and purchase must have been arm’s length transactions taking place within three years of each other.
The replacement property must also be of such a nature that, if it was transferred by the transferee immediately before the death of the transferor, it would, apart from the minimum period of ownership requirement, qualify for relief.
What is Business Asset Rollover Relief?
Business Asset Rollover Relief enables someone to defer any Capital Gains Tax liability arising from the disposal of a business or trading asset. If the proceeds are used to acquire other assets costing the same as, or more than, the amount received on a disposal of the old assets, the relief allows the individual to postpone paying tax until the disposal of those new assets.
If new assets are acquired for less than the amount received on the disposal of the old assets, partial relief will be available. You must acquire the new assets, or enter into an unconditional contract for the acquisition of the new assets, in the period twelve months before, and three years after the disposal of the old assets.
Your business must be trading at the time of the sale of the old assets and the purchase of the new assets, and the assets must all be used in your business.
Why use Business Relief
Access and Control
The investor retains access to their investment, and it is made in the client’s name. The holdings can be changed, and clients can withdraw their money. However, it should be noted that any withdrawals will form part of the estate and liable for IHT.
Once the investment has been held for two years the capital and any profits will obtain 100% relief from IHT, unlike trust planning or gifts which generally take seven years before they achieve the same position. A spousal transfer does not restart the two-year clock which enables investments to be passed with maximum efficiency.
BR opportunities are relatively simple compared to trust planning; there are no complex structures and they do not require notification to HMRC.
If you want to know more about the wide range of innovative estate planning solutions available, either:
Email us at firstname.lastname@example.org
Call 020 3195 3500
This guide is based on Stellar Asset Management Limited’s understanding of applicable legislation, law and current HM Revenue & Customs practice. It is provided solely for general consideration.
The information regarding taxation is based on our understanding of current legislation, which may be altered and depends upon the individual financial circumstances of the investor.