Insights

Covid has increased the inequality between the affluent and the not so affluent very significantly and has unfortunately created a lot of hardship for some people. In many instances, the wealthy have become even wealthier and yet some economies have been devastated. So much so, that the Organisation for Economic Co-operation and Development (OECD) is calling for change. They want countries to increase their rates of inheritance tax (IHT), scale back tax relief opportunities and close off any loopholes that are currently used to avoid this tax. In doing so, they believe the economies impacted by Covid-19 will be helped to recover.

Whatever happens in the future, we can expect all taxes to rise. Corporation tax is increasing to 25% in 2023, a rise to capital gains tax at some point is inevitable, and it is most likely that IHT will also be reviewed. In the meantime, it is important to be aware of remaining tax planning opportunities and to take advantage of them where possible. There is nothing worse than having to pay for something when you didn’t need to and that’s true of inheritance tax. It is often described as a tax you can potentially completely avoid and if you plan well ahead, gift your assets while you can, and look at other tax efficient ways of protecting your assets, it is possible not to be impacted.

One very effective option for inheritance tax planning and which tends to be overlooked, is the availability of Business Property Relief (BPR). This was originally introduced in the 1970s to help business owners transfer business assets between the generations and since then it has become progressively more generous.

Here are 5 reasons why Business Property Relief can help as part of a wider inheritance tax planning strategy.

High level of tax relief

A taxpayer can obtain between 50% and 100% tax relief on transfers of qualifying business assets and the definition of what qualifies has also been expanded.  Typically, property investment companies and those dealing in stocks and shares or investments will not be eligible. Owning property through a limited company which effectively creates value in the shares of that company will not usually qualify unless the company trades from the property or there is another qualifying business undertaken by the company which is of a substantial size.

Effective quickly

If you give non business assets away, you must survive the date of the gift by seven years for the asset to fully qualify as a lifetime gift; i.e., it is fully outside your estate for tax purposes. Business assets will fall outside your estate if they have been held for just two years. Therefore, using BPR is particularly helpful for people who might not be able to take advantage of the seven year rule due to health considerations.

Useful for shares

The ownership of certain types of unquoted shares will usually qualify for BPR and the shares can also be held within an ISA for additional tax advantages. Shares in AIM listed companies will qualify, whereas FTSE 100 shares do not. Approved VCTs and EIS or SEIS company shares also qualify for BPR.

Minority interest

You don’t have to be a majority shareholder or the main business owner to access BPR which makes it very versatile for tax planning purposes.

Stay in control

Unlike other IHT planning strategies – lifetime gifting being the most obvious – relying on BPR means you don’t lose control of the assets and you can still gain access to them. If you suddenly need to use the asset, for example to pay for care home expenses, you can sell it and use the proceeds.

There are some important exclusions to BPR; for instance, if you hold surplus cash within an unquoted company e.g., a close company that would otherwise qualify, this would be classified as an excepted asset. Loans to shareholders are also excluded. Holding surplus cash as working capital does not affect the availability of BPR.

To take advantage of BPR for inheritance tax planning, you need to be having conversations with your tax adviser at least two years before you wish to dispose of your assets. If you are interested in learning more about how Business Property Relief can enhance an inheritance tax planning strategy, contact us via partners@rjp.co.uk.