Business Property Relief
Business Property Relief (BPR) is a valuable tax relief that can help reduce the burden of Inheritance Tax (IHT) on business assets. Available in the UK, BPR can allow certain business assets to pass on to heirs free from IHT, potentially saving your estate significant amounts in tax.
Taking advantage of this relief is essential for businesses who do not wish the shares and assets within their company to be liable for a hefty tax penalty, should the worst happen. In addition, staying compliant with HMRC regulations and not inadvertently losing this relief requires essential tax planning and understanding of how this relief is applied.
What is Business Property Relief (BPR)?
Business Property Relief is a relief that can be claimed on specific business assets when they are transferred upon death. The relief can reduce the value of the business assets by up to 100% for IHT purposes, depending on the type of asset. This means that qualifying business assets may pass on to your heirs without being subject to the 40% Inheritance Tax rate.
BPR was introduced to encourage investment in and the continuation of family businesses. It enables business owners to pass on their wealth to the next generation, helping to ensure the future growth and survival of the business without the financial burden of a large tax bill.
Qualifying for BPR
For an asset to qualify for BPR, it must meet certain conditions. These can include:
Trading Company or Business: The business or asset must be involved in trading activities. Investments in non-trading businesses, such as passive investment companies, do not qualify. This includes cash left in the company account, which could inadvertently deem your company an investment company, without you realising.
Duration of Ownership: The asset must have been owned for at least two years before the transfer (through inheritance, gift, or sale).
Qualifying Assets:
- Shares in a Trading Company: If you own shares in a trading company, they may be eligible for BPR, provided the company is a going concern, actively trading, and not merely holding investments or cash.
- Business Property: Real property used in a business, such as commercial property or land actively used for trading purposes, may also qualify for BPR.
There are specific exceptions and rules to consider, which may vary depending on the nature of the business and assets involved. Professional advice is recommended to ensure your assets meet the eligibility.
Benefits of BPR
Inheritance Tax Reduction: BPR can significantly reduce the value of your estate for IHT purposes, potentially allowing your business assets to pass on to heirs without incurring a large tax liability.
Business Continuity: BPR helps ensure the continued operation of a family business by making it easier to transfer ownership to the next generation without the need to sell assets to pay IHT.
Tax-Efficient Succession Planning: With BPR, business owners can plan their succession without worrying about excessive tax charges. This allows for a smoother transition of assets to family members or others involved in the business. It also facilitates far more control and flexibility in the strategies.
BPR and Family Investment Companies (FICs)
It is essential to understand that BPR only applies to trading companies and not investment companies. If HMRC deem your company to be involved in a certain amount of investment activity, you will lose your BPR. This means if you invest or even just hold over the threshold in cash, within your trading company, you could inadvertently be seen as an investment company.
Whilst BPR applies to business assets, one effective strategy to protect BPR and transfer wealth efficiently is the use of a Family Investment Company (FIC). By making investments within a FIC and holding your profits in the FIC, trading company owners can continue to benefit from BPR, whilst also gaining flexibility in terms of control and wealth transfer. The FIC structure allows the business owner to pass on ownership of the company and related assets, ensuring both tax efficiency and family succession.
Examples of BPR in action
Let us say a business owner, David, has a family-run farming business valued at £5 million. David wants to grow his business by strategically investing in assets and providing loans from his investments to his trading company, ie, his farm. He needs to also ensure that, upon his passing, his business will be passed down to his children without incurring a substantial IHT charge. By structuring the business in a way that qualifies for BPR, David can pass the business shares directly to his heirs, effectively eliminating the IHT liability on those shares.
This allows David’s children to inherit the business without needing to sell off any farm assets to pay tax, ensuring the business remains intact and continues to operate. The BPR can be further protected by using a Family Investment Company (FIC), which adds an extra layer of control and flexibility for David.
Given recent changes to IHT rules, farms and farming families can benefit greatly from having a Family Investment Company in place. The size of a farm dictates the regulations that apply and the value of your estate and IHT liability. Should the worst happen, beneficiaries could be in a precarious position, facing a tax bill that they do not have the liquid funds to pay, causing them to have to sell farm assets, or the whole farm business. With a tax plan in place early, strategies to overcome these difficulties as the legacy continues can be addressed head-on.
How a Family Investment Company (FIC) can help protect BPR
A Family Investment Company (FIC) can be a highly effective tool to protect Business Property Relief and pass wealth on to future generations in a tax-efficient way, as well as investing to grow the company without risking your BPR. By using a FIC, business owners can continue to benefit from BPR, whilst gaining more flexibility and control over how those assets are passed down, and ensuring the trading company does not inadvertently become an investment company in the eyes of HMRC.
A FIC is a private limited company that is established to hold and manage investments, such as business interests, shares, or property, etc.. When structured correctly, a FIC can hold qualifying assets such as shares in a trading company or property, whilst still allowing the owner to retain total control over the assets.
The main advantages of using a FIC to protect BPR include:
Continuity of control: Whilst business owners may want to pass assets on, they often want to retain control over the operation of the business. A FIC allows the owner to retain decision-making power, even as ownership passes to the next generation.
Tax-Efficient wealth transfer: The FIC structure can allow for tax-efficient gifting of shares over time, enabling business owners to gradually pass wealth to their heirs whilst minimising Inheritance Tax exposure.
BPR protection for assets: If the FIC holds shares in a trading business or property, those assets may qualify for BPR, allowing business owners to transfer the ownership of the company or assets without incurring substantial IHT.
Succession planning: A FIC allows the business owner to set up a clear succession plan, where shares can be gradually passed to children or other family members. This can be done in a tax-efficient manner, ensuring business continuity and family control.
Example of BPR in action with a FIC
Let’s consider David again, who owns a family-run farm business valued at £5 million. In addition to running the business, David is also building a property portfolio for long-term wealth. He wants to ensure that both the business and property assets are passed on to his children without incurring a large Inheritance Tax liability.
By setting up a Family Investment Company, David can purchase his investments via his FIC. If the farm business qualifies for BPR, David can pass on shares in the FIC to his children, thus reducing or eliminating the Inheritance Tax burden on the business and property.
The FIC structure also allows David to retain control of both the business and the property portfolio, whilst gradually gifting shares to his children over time. This enables him to ensure the family inherits the business and property tax-efficiently, without needing to sell any assets to cover IHT.
Conclusion
Business Property Relief is an essential tool for reducing Inheritance Tax on qualifying business assets. There are many business owners who do not know that their BPR is at risk, due to their trading company being deemed an investment company by HMRC. This often happens below the radar when a business is sitting on too much cash, retains too much profit in the company or partakes in investment activity through the trading company. HMRC apply a 20% rule to determine if a trading company breeches the BPR rules, and without realising it, your company will lose its BPR benefit, inciting a 40% tax liability.
By using a Family Investment Company (FIC), business owners can protect BPR, pass on their wealth to future generations in a tax-efficient manner, and grow and maintain control over their business or property portfolio.
If you are considering how BPR applies to your business and assets or looking for ways to structure your estate for tax efficiency, a Family Investment Company could be a valuable strategy. Speak with a professional to learn more about how BPR and an FIC can work together to help you achieve your wealth transfer and succession goals.
