Business property relief is a way to shield some of your assets from inheritance tax.
Depending on the type of asset it is, you can qualify for either full (100%) relief or partial (50%) relief.
What is inheritance tax?
You pay inheritance tax on your “estate”.
To work out the value of your estate, you add the following together:
• the value of any property shareholdings you have
• the value of any business shareholdings you have
• the value of your vehicles
• how much cash you have in the bank
• anything you own of worth
• your Premium Bonds
• ISAs, shares, or investments that you hold in a trust
• any residential rental payments you’ve made in advance
• any due life insurance or term insurance pay-outs that are not in a trust
Those are your assets. Then you add the following together to find out what your liabilities are:
• the outstanding mortgage left on your home
• what you owe to finance companies, for example loans, credit cards, and bank overdrafts
• any unpaid or accruing household bills.
• an overdrawn directors’ loan account (if the company does not write it off upon your death)
• any director’s guarantee you have signed (so that your company could access finance – there is a strong chance the guarantee could be called upon by the lender upon your death).
You then subtract the liabilities from your assets and this comprises the value of your estate.
How do inheritance taxes work?
40% tax is payable by the recipients of your estate by the people you bequeath your estate to. They do not pay inheritance tax on the first £325,000 of value in your estate.
From the year 2020, different inheritance tax rules apply to your primary residential property. Parents or grandparents can pass on their main home with no inheritance tax payable if the property is worth less than £1m (or £500,000 per parent or grandparent).
What is business property relief?
Business property relief is a relief used when working out the value of your estate. It’s a way of bringing down the value of certain assets which, in turn, reduces any potential inheritance tax payment.
You can pass on some or all of your estate while you’re still alive and some of them may qualify for business property relief. There are two conditions:
• the person you give the asset to keeps it as a going concern until the time of your death, and
• you owned the asset for 2 or more year before you gave it away.
If you die within 7 years of giving the asset away and it doesn’t count for business property relief, it is still considered to form part of your estate. The person you give the asset to must pay 40% inheritance tax on it (if your estate qualifies for inheritance tax) within 2 years of your death.
In the third, fourth, fifth, sixth, and seventh year after your death, inheritance tax taper relief applies. Please below for how it applies.
|Years between gift and death||Tax paid|
|3 to 4||32%|
|4 to 5||24%|
|5 to 6||16%|
|6 to 7||8%|
|7 or more||0%|
Once seven years has passed, it is no longer part of your estate and can not be considered as a potential inheritance tax liability.
The following types of asset can have business property relief claimed against them at 100%:
• a business or an interest in a business
• securities on a private limited company not traded on a recognised stock exchange which either on their own or put together with shares in such a company give you control over the company
• shares in a private limited company not traded on a recognised stock exchange
50% business property relief can be claimed against the following:
• shared in a public limited company which give you control over the company
• property and land (plus machinery and plant) which are used either exclusively or mainly by a company or a partnership for business purposes*
• property and land (plus machinery and plant) which are under a life interest (a right held that last for the lifetime of the person holding that right, like a life tenant) and which are used by a business carried on by the person it is bequeathed or given to.*
* To qualify, the property must have been owned by you for at least two years to qualify for relief.
What to look out for
If you’re a sole trader, 100% business property relief is claimable when the business is transferred as a whole. However, there is no business property relief for property and land (plus machinery and plant) unless the assets are held in a trust. The sole trader business also needs to be operated by the person the business is bequeathed to or given away to and this person needs to have a life interest in that trust.
For partnerships, full 100% business property relief is claimable for their interest in the partnership. For property held in a personal capacity but lent to and used by a partnership, 50% relief is available. 100% relief on the property can only be claimed if the partnership owns the property.
There is no business property relief given on any loan made to a partnership following retirement.
The situation in Scotland is different. In Scotland, family partnership property can be split into different ratios according to the partnership agreement.
Directors of limited companies can’t claim business property relief on any loans they have made to a company. Any property that’s personally owned by a shareholder but used by the company will only qualify for the 50% relief bracket and that’s only if the property-owning shareholder controls the company.
Why do some assets qualify for business property relief and others don’t?
Business property relief is focused on protecting revenue generating businesses and entities to ensure their continued survival. Anything considered extraneous to that purpose will not qualify.
Therefore, business property relief does not apply to a company or shares in company which is not carried on for profit or for a commercial purpose, one that has drawn up Heads of Terms for its own sale (in legal terms, that’s “subject to contract”), or one that is being wound up.
Companies set up to generate investment incomes are also excluded – examples of these are:
• those dealing in securities, shares, or stocks
• residential property letting
• commercial property letting
• a company that deals property
• serviced offices
Types of businesses which are not clear-cut and will normally need case-by-case examination include:
• holiday companies
• property management companies
• property development companies whose activity includes property letting and property dealing
• businesses which mix farming and property letting
• caravan parks whose activity includes property letting, holidays, and the sale of caravans.
Generally, HMRC consider farming businesses, woodland management companies, and enterprises involved in shooting and fishing as trading entities so qualify for business property relief.
Be careful about letting cash accumulate in your company account too. If HMRC deems that there is so much cash in a business and not all of it is needed for the continuation of a business, it will seek to reclassify a proportionate amount of a company’s shares to make it liable for inheritance tax.