What is Business Relief?
When someone dies, their estate is valued, and depending on the value, some of the estate will be subject to Inheritance Tax (IHT). Some business assets are exempt from IHT. Business Relief (BR), also known as Business Property Relief, is a form of tax relief that reduces or eliminates the value of qualifying business assets when an estate is being valued for IHT.
We’ve broken the article down into the following sections so you can quickly find the information you need:
- What is the purpose of Business Relief?
- What are the benefits of Business Relief?
- Types of assets that qualify for Business Relief
- How to claim and risks associated with Business Relief
The purpose of Business Relief is to facilitate business continuity after the death of a business owner or investor. With Inheritance Tax payable on the portion of an estate that exceeds the IHT threshold, some trading businesses would not survive if tax was due on the value.
Inheritance Tax in brief
If, at the time of death, the total value of your estate falls beneath the IHT threshold, which is currently £325,000, there’s no IHT to pay. This is the Nil-Rate Band (NRB). If your estate is worth more than £325,000, the portion that exceeds this threshold is subject to Inheritance Tax – currently at a rate of 40%.
Some estates also qualify for the Residence-Nil Rate Band (RNRB). This is available when residential property is left to direct descendants and is in addition to the NRB of £325,000. the maximum RNRB is £175,000 in 2021/22.
- You leave assets to the value of £950,000 to your children, which includes your main residence, worth £300,000.
- No IHT is due on the first £200,000 of your estate (the NRB of £325,000 and the maximum RNRB of £175,000).
- The taxable portion of your estate is £450,000 (£950,000 minus £500,000).
- At the current rate of 40%, the IHT due is £180,000 (£450,000 x 40%).
- Your children are left with £770,000 (£950,000 minus £180,000).
Note: Any property left to a spouse or civil partner is exempt from IHT and any unused NRB and RNRB can be transferred to them.
Business Relief in brief
Business Relief is a tax relief that enables certain business assets to be transferred to a beneficiary with a 50% or 100% reduction in Inheritance Tax (more about this later).
Keeping the family business alive
Small and medium enterprises (SMEs) account for more than 90% of businesses in the UK, and for approximately half the total employment and turnover of private-sector UK business. Without Business Relief, the death of a business owner could mean the death of a family-run business. BR safeguards the interests of SMEs, which are so crucial to the economy.
In the case of a family business, assets are frequently given as gifts. An entire business, building, or piece of equipment might be transferred, without payment, between family members. If the donor dies within seven years of the transfer, the asset will potentially be subject to Inheritance Tax.
However, a gifted business asset could qualify for BR if:
- The donor owned the asset for a minimum of two years before giving it away.
- The recipient has continued to operate the business as a going concern or has continued to employ the asset for the purpose of the business until the time of the donor’s death.
- The original asset (building/land/machinery) has been replaced with a similar asset of equal value for the purpose of the business.
Leaving more to your beneficiaries
Business Relief can play an important role in planning the posthumous transfer of your wealth. In the examples above, we see that IHT-exempt property can be a cost-effective way to ensure that your family is not faced with a huge tax bill when they inherit.
Investing in assets that qualify for BR has the potential to increase your wealth, although there’s also a risk of loss, leaving you and your family with less money than you started with. However, depending on the amount of money invested, and the types of assets you own, even a loss of capital can be sometimes be outweighed by the amount of money saved from IHT exemption.
Maintain ownership of your wealth
After seven years, gifted property is no longer counted as part of a deceased person’s estate. So, if you give away your assets more than seven years before you die, those assets will not be subject to inheritance tax.
But giving away assets during your lifetime comes with risks. Deteriorating health and mobility can incur the costs of adapting your home, moving home, or nursing care. For many reasons, most people prefer to maintain ownership of their assets until the end of life.
With a BR-qualifying investment, you hold onto your money. You own the capital and any profit that it generates. After two years, your shares become exempt from Inheritance Tax.
Business Relief is available for trading businesses, as opposed to those dealing in stocks and shares, letting of property, and the holding and making of investments.
HMRC guidance stipulates that a business is trading if at least 50% of its activity is trading activity, and less than 50% is investment activity. The business either qualifies for BR in its entirety, or not at all.
In all cases, BR applies only where the deceased has owned the asset for at least two years.
Assets that qualify for 100% BR
- Shares in an unlisted public limited company (PLC)
- Shares in a private limited company (Ltd)
- Shares listed on the Alternative Investment Market (AIM) – a sub-market of the London Stock Exchange
- Ownership of a sole trader business
- Part-ownership of an unincorporated business (partnership)
Assets that qualify for 50% BR
- Shares that control more than 50% of the voting rights in a listed public limited company – i.e., a company that’s listed on the London Stock Exchange
- Buildings, land, or machinery used wholly or mainly for the business of a partnership or company that the deceased had an interest in
Assets that do not qualify for BPR
- Interest in a business that generates at least 50% investment income
- Shares in a company listed on the London Stock Exchange (unless the deceased owned more than 50% of the company’s shares
- Interest in a not-for-profit business or charity
- Interest in a business that’s subject to a contract for sale
- Buildings, land, and machinery that was not used mainly in the qualifying business during the two years preceding the transfer of ownership
- Buildings, land, and machinery that will not be used in the qualifying business after the transfer of ownership
- Property for which Agricultural Relief is being claimed
When an estate is subject to Inheritance Tax, the executor must fill out form IHT400 (Inheritance Tax account). If the estate includes qualifying business assets, form IHT413 (Inheritance Tax: business and partnership interests and assets) must also be filled out in order to claim tax relief. These two forms are submitted to HMRC.
What are the risks associated with Business Relief?
In the 1976 Finance Act, Part IV (Capital Transfer Tax), the new relief for business property was introduced. Its purpose was to protect family-owned businesses from Capital Transfer Tax liability, enabling them to survive as a trading entity after the death of an owner. In the mid-1980s, Capital Transfer Tax was replaced by Inheritance Tax.
The BR scheme was tailor-made for the protection of family-owned businesses, designed to mitigate the risks of financial collapse. So, in the case of a family-owned business, tax legislation takes on the role of support.
BR, though, can be a handy tool when it comes to financial planning. For a family-owned business, BR is just there. In alternative scenarios, BR can be pursued and used to advantage.
This is where the risks lie.
Capital is at risk
A company listed on the London Stock Exchange does not qualify for BR – unless you own at least 50% of the shares. Qualifying unlisted companies, however, are typically smaller and less dependable. Shares can easily fall in value, and they could be difficult to sell.
There’s a risk of reducing, rather than increasing, your estate.
Tax legislation could change
However diligently you plan for the transfer of your property, there’s always the possibility that tax rules will change. BR entitlement is assessed by HMRC after you die, on presentation of forms IHT400 and IHT413. Entitlement depends on the BR-qualifying status of your business property at the time of your death.
Are the rules different if I leave my business property to my spouse?
Yes. Under present legislation, no inheritance tax is due on property that you leave to your spouse or civil partner, and many married couples make use of this rule when planning their wills. You can leave all your business assets to your spouse or civil partner, and there’ll be no IHT to pay, regardless of the BR-qualifying status of those assets.
If I inherit business assets from my spouse, will I have to own those assets for two years before they qualify for BR?
No. In the case of IHT, you and your spouse are treated as one. So long as the combined period of ownership equals or exceeds two years, the business assets transferred to you by your late spouse will be eligible for BR, on the condition that they’re qualifying assets. For example: your spouse owned some qualifying shares for one year before their death, when they were transferred to you; 13 months later, you die, and the shares are transferred to your children; a combined 25 months’ ownership means that the shares qualify for BR.
How do I decide how to invest my money?
There are so many options, and a multitude of factors to consider, such as: How much money is needed for emergencies? / Will I have access to the money I invest? / What level of risk am I prepared to take? We recommend seeking guidance from an experienced independent financial adviser, who will look at your entire financial situation and help you to make the right decisions for you and your family.
How do I work out if my business is “mainly” a trading business?
If your business engages in both trading and investment activity, its BR entitlement may not be clear-cut. To qualify for BR, business activity must be mainly trade, and “mainly”, in this context, means more than 50%. To calculate the trading percentage, every aspect of the business is considered, with reference to turnover, investment, profit, and employee time. It’s a complex calculation, and expert advice is recommended.
If you’d like to learn more about Alan Boswell Group’s financial planning services, please don’t hesitate to give us a call at any of our regional offices.
Please note, the value of an investment and any income from it can go down as well as up and you might not get back the original amount invested. The past is not a guide to the future.
The value of tax benefits depends on your individual circumstances and the laws concerning these can change.