The inheritance tax in the UK applies not just to the assets of the estate of a deceased person but also on transfers of value during a person’s lifetime. There is a nil rate band of £325,000, but on transfers above this amount the inheritance tax is charged at 20% on lifetime gifts and at 40% on the estate of a deceased person. However lifetime gifts from one individual to another are generally chargeable to inheritance tax only if they are made within seven years before the donor’s death.
In the absence of any relief for business property, the inheritance tax would give problems for handing on a family business because there would be a potential tax liability on the assets. In addition to inheritance tax such transfers during the lifetime of the owner also have capital gains tax (CGT) implications and careful tax planning using available reliefs (such as the entrepreneur’s relief for CGT) is always necessary to ensure a smooth succession of a family business.
For inheritance tax, the business property relief is very important as it can mean that there is no inheritance tax liability on the transfer of the business assets. However the business must plan carefully to ensure that the transfer is made in such a way that it qualifies for the full business property relief.
The definition of business property subject to the business property relief includes the business of a sole trader or a share in a partnership; unquoted securities of a company which, with the unquoted shares, give the transferor control of the company; or any unquoted shares in a company. Business property relief is available at 100% on these types of business property.
Business property relief is available on certain other business assets at the rate of 50%. These include quoted shares or securities of a company that give the transferor control of the company; assets used mainly for the business of a company controlled by the transferor or by a partnership of which the transferor is a partner; or any assets used by the transferor’s business that were held in a trust in which the transferor had an interest in possession.
The business property must have been owned by the transferor for two years, or be replacement property where the transferor’s combined period of ownership is at least two years out of the last five. In this case, the business property relief is given on the lower of the value of the original property or the value of the replacement property. This condition does not apply however if the previous transfer of the property was eligible for business property relief and either the earlier or the subsequent transfer was on the death of the transferor. However if a person who sets up a new business dies within two years, no business property relief is given on the business assets.
Certain types of business do not qualify for business property relief, these being businesses that deal in stocks and shares; those dealing in land and buildings; and those engaged in making or holding investments. Where the making of investments is only a part of the business activity, but not the main business activity, case law appears to suggest that it may still be possible to obtain business property relief on the transfer of the business.
Where business property relief is available on a lifetime transfer and the transferor subsequently dies within seven years of the transfer, the business property is still available when calculating any additional tax due provided that the original or replacement property continued to be owned by the transferee from the date of the transfer up to the transferor’s death and that at the date of the transferor’s death it is relevant business property for the purposes of the business property relief.
The business property relief does not apply to assets that were not used mainly for business purposes in the two years before the transfer of the business, and are not required for future business use, these being referred to as excepted assets. An example would be where the business is holding large amounts of cash and this is not being used for business purposes at the time of the transfer or in the foreseeable future. Another example is that where the business is letting out property, HMRC may maintain that these let assets are used for investment rather than for the main purpose of the business. The courts have in such cases looked at the business as a whole to see if such let property is an integral part of the whole business operation, in which case business property relief may be available on all the business assets.
The business property relief is given automatically, without the need for a claim by a taxpayer or the personal representatives. However where a business is to be transferred consideration must be given to the application of the relief and the transferor must ensure as far as possible that 100% business property relief is obtained on the business assets. This may involve for example ensuring that the business is transferred as a whole, to ensure that it falls into the definition of the business of a sole trader or a share in a partnership. Any likely problems, such as the possibility that some assets are regarded as excluded assets, should be considered before the transfer takes place.
Sources:
HMRC website www.hmrc.gov.uk
“Taxwise II 2009/10” by R. Bennyworth, S. Jones and M. Waterworth, Lexis Nexis 2009