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Business Tax  •  IHT  •  Personal tax  •  Probate and Inheritance Tax  •  Tax Planning  •  Tax Relief

New restrictions to BPR could create IHT liability for business owners

By RJP LLP on 18 July, 2013

Business Property Relief (BPR) is a tax relief that can lower your inheritance tax (IHT) liability by reducing the chargeable value of business assets. In some cases the reduction available is as much as 100%, meaning the business asset effectively becomes exempt from IHT, whereas in other situations the exemption is limited to 50% of the value of the asset.

New restrictions to the availability of BPR become effective from July 2013 and whilst it may be difficult to alter your affairs with tax planning to take these into account now, an awareness of these changes will enable you to arrange future borrowings to ensure you retain maximum relief.

What is covered by BPR?

100% BPR is available to sole trader businesses or partners owning a share in a partnership and to those owning shares in a privately owned company, which includes unquoted companies and those quoted on AIM.

50% BPR is available to reduce the chargeable value of assets used in a business (e.g. land, buildings) in which the owner of the asset is ether a partner in the business or a majority shareholder in the company involved. It is also available for majority shareholdings in quoted companies.

What are the new restrictions to BPR?

In the 2013 Budget, it was announced that new restrictions to the availability of BPR will apply where a taxpayer has borrowed funds in order to acquire the asset which qualifies for BPR.

It has been a widely used commercial strategy for entrepreneurs and business owners to raise funds against their family home in order to acquire business assets. This is often an easier way to raise funds than by borrowing outright against the asset concerned, as the lender has the security of the family home. It has also had the (often unintended) tax advantage that the value of the family home is reduced by the amount of the borrowings, correspondingly reducing the overall IHT liability; the assets purchased with the borrowed funds will be exempted from IHT (by either 100% or 50%) by the offset of BPR.

The changes introduced will limit the deduction available for such borrowings so that no deduction from IHT will be allowed for a debt to the extent that it has been incurred to acquire property which is excluded from the charge to IHT. So where a debt has been incurred to acquire assets on which BPR is due, that debt will be taken to reduce the value of those assets, and not the value of other assets (for example the family home).

For example, Mr Brown has a property valued at £2 million against which he has borrowings of £500,000 which were used to acquire shares in a company of which he is the 100% owner. The current value of those shares is £1 million.

Before the changes to the legislation, the IHT liability of his estate on death would have been £470,000 calculated as follows:

Property                             £2,000,000

Less: borrowings                                      (£  500,000)

Shares                                £1,000,000

Less: BPR 100%                                       (£1,000,000)

Chargeable asset             £1,500,000

Lifetime IHT exemption                         (£  325,000)

£1,175,000

IHT @ 40%                                                   £470,000

Today, following the changes, the IHT liability of his estate on death will be £670,000 as follows:

Property                           £2,000,000

Shares                              £1,000,000

Less: borrowings                                      (£  500,000)

Net value of shares        £500,000

Less: BPR 100%                                        (£  500,000)

Chargeable asse            £2,000,000

Lifetime IHT exemption                          (£  325,000)

£1,675,000

IHT @ 40%                                                      £670,000

Review the implications of debt on BPR

In order to retain maximum entitlement to BPR, it will be essential for business owners to review the implications this change will have on the chargeable value of their business assets, and not to simply assume they are fully covered by BPR.

It is important to be aware that the restrictions imposed are focused on identifying the purpose of the borrowing; where you borrow funds to buy your family home, the debt will be offset against the value of the home. However where you borrow funds to acquire assets which qualify for BPR, the debt will now be offset against those assets and not against other assets against which the debt may be secured, as was previously the case. This will inevitably reduce the BPR available.

Therefore for IHT purposes, it will now be advantageous to use borrowings to purchase non qualifying assets and use your own cash (where possible!) to purchase qualifying assets.

Given the complexity of BPR, our advice to clients is to have your situation reviewed. Do not assume that because you own a business the full value will now automatically qualify for BPR. As this latest development highlights, there are many conditions and restrictions that could exclude or reduce the relief available and you could inadvertently incur an unexpected tax bill.

For more information about tax planning for business owners and entrepreneurs contact Lesley Stalker by emailing las@rjp.co.uk.

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