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Business property relief and inheritance tax

19 July 2011

When one is preoccupied with the everyday running of a business, or with the one-off opportunity of selling it, it is easy to overlook the importance of securing business property relief (BPR) – but this can be a hugely valuable relief against inheritance tax.

The rules prevent property getting BPR if the business consists “wholly or mainly of…dealing in land or buildings or making or holding investments”. This can lead to problems.

The scale of the business considered in the case of HMRC v Brander was exceptional. However the principles derived from the case may help those with mixed businesses (ie parts obviously qualifying for BPR and parts obviously not qualifying) to focus on rearranging their affairs to secure BPR.

An investment or letting element can be sheltered within a business which gets BPR, but once that element exceeds 50 per cent, it can lead to the disastrous loss of all the BPR. Close examination of one’s business with professional advisors is essential. The only safe course of action may be to transfer non-qualifying assets out of the business before the 50 per cent tipping point is reached.

The other main requirement for a business asset to qualify for BPR is that the business owner needs to have owned the qualifying asset (which can include a replacement asset) for at least two years before death. Again, overlooking these requirements can lead to problems.

In the case of Vinton v Fladgate Fielder, the restructuring of a company failed to consider the loss of BPR should the founder’s widow die.

The widow’s allotted shares in a rights issue qualified for BPR as replacement property because they were related to her pre-existing shares (which she had already held for long enough). She bought a second tranche of shares through an offer of shares for subscription. Had she owned that second tranche for at least two years before she died, then they too would have attracted BPR. However, she died two days later and there was an unexpected inheritance tax bill.

In the case of Swain-Mason v Mills & Reeve no regard at all was paid to the BPR on the shares being sold by the company’s owner. He could have put off the sale until he had recovered from the surgery he was undergoing. Instead he signed the sale agreement before the operation. He died, as a result of which the large deferred cash consideration no longer qualified for BPR, leading to a much bigger inheritance tax bill than there should have been.

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Chris Wills LLB (Hons)
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