Planning ahead and claiming Business property relief could avoid that!
Business property relief is very important. Every business owner that would like to save tax on inheritance tax.
Business property relief reduces the transfer of value of the property transferred for inheritance tax purpose
However, to be able to enjoy this relief, your business would have been run in a certain way.
The GIFT OF A BUSINESS BY A DECEASED PERSON
When an individual makes a gift of a relevant property when at death, the executors can claim business property relief if certain conditions are met.
RELEVANT BUSINESS PROPERTY
They are as follow:
- A business – 100% relief
- Shares in an unquoted trading company – 100% relief
- Gift from a Quoted trading company where the donors own more than 50% control – 50% relief.
- A Gift of Land and building /machinery used by a company controlled by the donor or by his partnership – 50% relief.
MAJOR FACTOR TO CLAIM BUSINESS PROPERTY RELIEF.
For the executors of the estate to be able to claim this relief the business or asset must be owned by the for 2 deceased years before death.
WHEN THE BUSINESS TRADES IN RESTRICTED ACTIVITIES.
Restricted activities such as securities, stock, shares, land or building, making or holding investment.
If the business trades mainly in the activities stated above, BPR relief would not be available.
However, if the business trades in mixed activities, there would be needed to consider if BPR is available or the extent to which it is available.
When BPR is available, the amount of relief would be restricted to the extent of the excepted asset held by the business.
EXPECTED ASSET THAT REDUCES BUSINESS PROPERTY RELIEF.
An asset would be an expected asset if they are not used wholly or mainly for the purpose of the business concerned.
It would be used throughout the whole of the last two years of the relevant period.
This would not be required for future use in the business.
CONSEQUENCES OF EXPECTED ASSET WITH BUSINESS PROPERTY RELIEF.
The consequence is the application of a gateway test.
The purpose of the gateway test is to consider the availability of business property relief and the restriction on the BPR available.
THE GATEWAY TEST APPLIED FOR BUSINESS PROPERTY RELIEF.
The share and asset valuation manual by HMRC states that the only grounds on which this relief may be denied
This happens when the business of holding and the subsidiary company is viewed as a whole.
HMRC has stated that the approach is to look at each company in the group or the business whether the purpose of the company is mainly for investment or non-investment.
From a previous tax decision in Farmer vs IRC (1999), It was reached that some conditions must be considered.
CONDITIONS TO CONSIDER.
- The overall context of the business
- Capital employed
- Time spent by the employees and directors
- Spilled of turnover between trading and investment activities
- Amount of profit derived from the trading and investments part of the business.
OTHER CONDITIONS WHEN BUSINESS PROPERTY RELIEF IS NOT AVAILABLE.
- When the business gifted is a not-for-profit organization.
- Occasions, when the deceased makes a gift their business, and they are sold immediately. The exception to this is if the sale is to a company that will carry on the business. Also, the executors would be paid mainly in shares of the new company.
- The relief would also not be available if the business is being wound up. The exception to this is if its parts of a process to allow the business of the company to carry on.
- If the business also qualifies for Agricultural Relief.
- When the business is not needed for the future.
WHEN A BUSINESS OWNER GIVE THEIR BUSINESS WHILE STILL ALIVE.
An individual can make a gift of their business while they are still alive and qualify for business property relief.
If this business meets the conditions stated above, The recipient must still keep running the business as a going concern and still own the business when the donor of the business dies.