What is Business Property Relief?
It is not uncommon for trustees or executors to have to deal with business assets as part of a trust or estate administration. If this is the case, it is important that they are aware of Business Property Relief (BPR) and how this works. If BPR is available, it could ultimately reduce or eliminate a potential Inheritance Tax (IHT) liability.
BPR can be available at either a 50% or 100% reduction in IHT (depending the what the business assets consist of) and this relief can be utilised whether the transfer of business assets takes place on death or during someone’s lifetime.
If you are an executor claiming BPR, this is done by completing schedule IHT413. This schedule forms part of the IHT400 form (the form required to be completed in order to calculate the amount of IHT payable after someone’s death) which will form part of the process of applying for a Grant of Probate. In an intestacy (where someone dies without a Will) the administrator of the estate will take on this role instead.
The executor or administrator (collectively known as a personal representative) will have the responsibility of valuing all the assets of the estate and if IHT has to be paid, it is especially important to ensure that all the valuations are accurate so that the right amount of IHT is calculated. It is likely that the personal representatives will need to obtain a professional valuation of the business assets, this will need to be an open market valuation of the asset as at the date of death. The Inland Revenue will expect a copy of this valuation to be submitted to them along with the IHT400 forms as evidence of this.
Generally, BPR can be claimed on business assets such as property and buildings, unlisted shares and machinery. Whether you can apply for 100% relief or 50% will depend on what the business assets consist of.
100% relief is available on;
· The value of a business and shares in an unlisted company.
50% relief is available on;
· Shareholdings controlling more than 50% of the company’s voting rights in a listed company.
· Land, buildings or machinery which is used in the business where the person was a partner or controller.
· Land, buildings or machinery used in the business held in trust, which the person had a right to benefit from.
It is important to note that these reliefs are only available if the person involved had owned the business for at least two years before the transfer takes place.
There are several exclusions, where it will not be possible to claim the BPR. For example, if the company is a not-for-profit organisation or the company 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).
In addition, it won’t be possible to claim BPR if the asset is also eligible for Agricultural Property Relief (which provides 100% relief) so the personal representative will need to look carefully at the reliefs available when it comes to a farming business to ensure that they claim the correct type of relief.
The personal representative and trustee will also need to evidence to the Inland Revenue that the assets involved where used mainly for business purposes, and had been used as such within at least the last two years prior to the assets being gifted (whether this gift was made during their lifetime or on their death). Also, the relief won’t be available if the assets involved would not be needed for the future running of the business.
It is always important that personal representatives and trustees get the right advice when there is a transfer of business assets. It will be the responsibility of the personal representative or trustee to ensure that the assets are administered correctly and that they are dealt with as tax efficiently as possible. It is not just BPR that they will need to consider but there may be Capital Gains Tax and Income Tax liabilities as well. Both trustees and personal representatives could be personally liable if they make a mistake and the estate or trust suffers a loss as a result, even if this mistake was completely unintentional.