Using Business Relief To Reduce Inheritance Tax

Inheritance Tax is a tax charged on the value of a person’s estate at the date of his or her death. The rate of inheritance tax on a deceased estate is currently 40%. There can sometimes be Inheritance Tax payable on lifetime gifts, such as gifts into trusts. The rate at which inheritance tax is levied on lifetime gifts is 20%.

Although there are valuable Inheritance Tax exemptions, (most notably the exemption for assets transferred to a spouse or civil partner either during lifetime or death) and there are also nil rate bands which can remove significant value from exposure to Inheritance Tax, these can easily be used up by the value of the family home leaving other assets at the mercy of the taxman.

With this in mind, it is important to be aware of other reliefs which are available to reduce Inheritance Tax liabilities. The two which will be most familiar are Business Relief and Agricultural Relief. This article will examine the main features of Business Relief.

What is Business Relief for Inheritance Tax?

The value of a business, share of a business, or shares in an unquoted trading company, is included in an estate for Inheritance Tax purposes., However Business Relief (often also referred to as Business Property Relief for Inheritance Tax) can apply to business assets. The effect of the relief will be to remove either 50% or 100% of the value of the business asset from the charge to Inheritance Tax. It is important to be aware that the relief applies to gifts made during lifetime as well as deceased estates.

Proper planning can help to maximise the benefit of Business Relief.

What qualifies for Business Relief?

• 100% Business Relief can be claimed on a trading business or interest in a trading business or on shares held in an unquoted trading company
• 50% Business Relief can be claimed on:
• shares controlling more than 50% of the voting rights in a listed trading company
•  land, buildings, or machinery owned by the deceased and used in a pleading business he or she controlled or was a partner in

What doesn’t qualify for Business Relief for Inheritance Tax

You can’t claim Business Relief if the –

Business or asset was not owned by the deceased for at least at least 2 years prior to the date of death or the date on which the lifetime gift is made.

Business Relief it is not available if the –

Business:

• mainly deals with securities, stocks or shares, land or buildings, or in making or holding investments
• is a not-for-profit organisation
• is subject to a binding contract for sale, 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
• is being wound up, unless this is part of a process to allow the business of the company to carry on

Business Relief is also not available if the –

Asset: 

• also qualifies for Agricultural Relief or wasn’t used mainly for business in the 2 years before it was either passed on as a lifetime gift or as a transfer on death 
• is an “excepted asset”

What is an excepted asset?

HMRC examine whether an asset – whether it be excess cash, “private” property or other such “personal” assets – is being held within the trading company or trading business solely to shelter it from liability of Inheritance Tax as a business asset. The holding of such assets not used wholly or mainly for business purposes will be excepted from Business Relief.

Quite often businesses choose to retain heavy cash balances for what appear to be legitimate business purposes such as a buffer for when times may get bad, however the courts have determined that unless there is a specific future purpose for which the excess cash is earmarked, Business Relief will not apply to it. Proper planning is particularly important in this area.

Business Relief planning?

For detailed advice and guidance on all Inheritance Tax matters, please contact David Gillies at Friend Partnership.

You can call David on 0121 633 2007 or contact him by email at david.gillies@friendllp.com