Whether shares in a company are liable for Inheritance Tax (IHT) depends on a number of factors. Perhaps the most obvious factor is whether the level of estate is above the IHT threshold. If the value of the estate is less than £325,000, no IHT is payable. However, if the value of the estate is more than £325,000, the liability for IHT on the shares depends on whether the shares are held in a quoted company or a private unquoted company. Business property relief applies to certain types of shares and business assets owned by the deceased.
Business Property Relief and IHT
The UK government introduced Business Property Relief in 1976. The idea was to allow family businesses to continue to trade after a death without having to sell the shares or business assets to pay Inheritance Tax.
Sole traders can also now qualify for Business Property Relief if the entire business is being transferred to another. The scope of Business Property Relief continues to evolve but its underlying principle remains the same.
How does Business Property Relief work?
Private businesses can claim Business Property Relief. The core principle when considering shares is that the business is not listed as a public company on the stock exchange. Those that do qualify are:
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- shares in private limited companies
- shares in companies listed on the Alternative Investment Market (AIM).
In addition to the qualification of the shares, at least 50% of the company’s activities must be trading activities. Also, the company must have traded for at least two years and it must not be considering sale, liquidation or administration.
Entire family businesses passed down through the generations can also qualify. If the above tests are met, the business qualifies for 100% Business Property Relief. Where a company operates as an investment company it will not qualify for this relief. One specific type of business asset excluded from Business Property Relief is a buy-to-let property. This is because it is viewed as purely investment.
Finally, there are two rates of Business Property Relief that apply. The 100% rate applies to shares as previously discussed and a 50% rate that applies to land, buildings, machinery and plant used mostly or entirely in the business.
Business Property Relief also applies after death when winding up the estate. This means the allowance must be claimed when completing the Inheritance Tax Return (IHT 400 – Inheritance Tax Account - and Schedule IHT413 – Business or partnership interests and assets).
Lifetime planning and Business Property Relief
One of the key considerations when conducting lifetime planning when a business is involved is what should happen to the business on the death of the owner. If the likely beneficiaries have no interest in continuing the business, that could cause some tax headaches.
If you do own a business which you know will not qualify for Business Property relief – a buy-to-let business is a perfect example – you may consider gifting this property to a family member who is going to continue with it or place the business in a trust for the benefit of others. This then becomes a potential exempt transfer which will result in no IHT being payable if you survive for seven years or more after making the gift. However, if you continue to receive an income or other benefits from the business, it will be considered a gift with reservation of benefit and that could mean the recipient of the trust would be asked to pay any IHT.
Specialist Estate Planning Lawyers, Edinburgh
Everyone’s circumstances are different and estate planning choices can be difficult. Murray Beith Murray Partner, Peter Shand, is head of the Asset Protection group and is a specialist in succession and estate planning. If you think Business Property Relief might be an option for you or would like further information or advice, please contact us.
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