In this month’s article in our ‘Keep It Simple’ series, Neil Da Costa tackles a popular IHT topic that features regularly in tax exams.
Business Property Relief (BPR) is the most important inheritance tax (IHT) relief and makes business assets tax free for IHT during the lifetime and on death. It is available on worldwide businesses as long as the business asset has been owned for at least two years BPR is available at two rates – either 100% or 50%. Note that 100% BPR can be claimed on unincorporated businesses and any shares in an unquoted trading company. On the other hand, 50% relief is available on a controlling interest in a quoted company, or an asset owned by an individual and used by a partnership in which the individual is a partner, or a company controlled by an individual.
Simple example: what percentage of BPR is available on the following assets owned for two years?
3% holding in an unquoted trading company. 40% holding in a quoted trading company. 60% in an unquoted company dealing in investments.
Building owned by a partner and used in the partnership. 51% holding in a quoted trading company.
Solution to simple example
100% – any shareholding in an unquoted trading company is eligible for 100% BPR. 0% – 50% BPR is available on a controlling interest in a quoted company. 40% is less than 51%. 0% – the company is an investment company so is not eligible for BPR. 50% – this is an asset owned personally by the partner and used in the partnership business. 50% – this is a controlling interest in a quoted company.
BPR on lifetime gifts
A lifetime gift of a business asset is eligible for BPR as long as the two-year ownership period is satisfied. It is possible to amalgamate the ownership period of spouses and the donee must still own the business at the date of the donor’s death.
Simple example: Dante’s Deli
Dante has owned his unquoted trading company for many years and decides to gift the company to his daughter, Chelsea. The value of the company at the date of the gift is £500,000 and 20% of the assets are investments.
Dante has already used up his nil rate band and annual exemptions.
Dante is unwell and expected to die three or four years after the gift.
What would happen if Chelsea still owns the business at the date of Dante’s death? Compute the tax if Chelsea sells the business before Dante dies and offer planning advice to Chelsea.
Solution to Dante’s Deli
Dante has owned the unquoted trading company for at least 2 years, so the gift is eligible for 100% BPR. However, 20% of the assets are investments so the BPR is restricted to the business assets £500,000 x 100% x 80% = £400,000.
As Chelsea still owns the business at the date of Dante’s death, the PET of £500,000 is eligible for £400,000 BPR.
The inheritance tax payable by Chelsea will be £500,000 – £400,000 = £100,000 x 40% = £40,000.
As the PET took place three or four years before death, the tax is reduced by 20% taper relief. Chelsea would have to pay £40,000 x 80% = £32,000 IHT.
Unfortunately, if Chelsea sells the business before Dante’s death, the BPR is withdrawn and the full £500,000 is taxable.
The inheritance tax payable by Chelsea will be £500,000 x 40% = £200,000.
As the PET took place 3-4 years before death, the tax is reduced by 20% taper relief. Chelsea would have to pay £200,000 x 80% = £160,000 IHT.
By Chelsea retaining the business until Dante dies, the tax liability reduces from £160,000 to just £32,000 and she will save tax of £128,000 and we would recommend selling the business after Dante’s death.
BPR on death estate
BPR is also available on the death estate which allows businesses to be inherited by the next generation without any tax liability.
Simple example: Kwame Partnership
Kwame has a successful legal partnership which he has owned for more than two years and is valued at £600,000. In addition, Kwame personally owns the office building used by the partnership which is worth £1million.
Kwame is divorced and, on his death, left his entire estate worth £3 million to his son, Kojo, who also works as a lawyer in the firm. Kwame did not make any lifetime gifts and his estate includes a main residence worth £800,000.
How much IHT is payable on the death estate?
Solution to Kwame Partnership
Kwame’s death estate is eligible for 100% BPR on the partnership of £600,000. In addition, the building used by the partnership is eligible for 50% BPR of £500,000. The total BPR available is £1.1m.
Kwame’s death estate is worth more than £2.35m so no residence NRB of £175,000 can be claimed. The relevant estate for the test is before BPR.
The taxable death estate is £3m – £1.1m BPR £325K NRB = £1,575K
IHT payable on the death estate will be £1,575 x 40% = £630K.
• Neil Da Costa is a Senior Tax Lecturer with Kaplan in London. He is the author of Advanced Tax Condensed which summarises the entire syllabus using memory joggers