Business Property Relief - Reduce the Amount of Inheritance Tax on Your Business Assets
We recently considered the basics of Will drafting and the succession of Mrs Otto's share of her private dental practice, Gnasher & Brace (G&B). Here, we will explore a type of relief from inheritance tax - 'Business Property Relief' (BPR).
The personal representatives of Mrs Otto's estate might claim BPR to try to reduce the amount of Inheritance Tax (IHT) that might be payable by Mrs Otto's estate.
An Overview of Business Property Relief
IHT is charged at a rate of 40% on estates that have a gross value that exceeds the nil rate band allowance of up to £325,000 (or up to £650,000 on the death of the survivor of a married couple or civil partners). If an estate includes a residential property that is being left to the deceased's descendants, the value of an estate that is charged to IHT at the nil rate can be up to £1,000,000.
It is possible to claim relief from inheritance tax on certain assets to reduce the amount of IHT that is payable to the Revenue.
Broadly, the purpose of BPR is to reduce the overall taxable value of business assets that are the subject of a gift.
How Does BPR Work?
To qualify for BPR in an estate, the asset that is being transferred must be 'relevant business property'. This means that the asset must, firstly, be one that fits into one of the categories of business property defined in statute.
Secondly it must have been owned by the person who has died for a minimum of two years, leading up to the date of death. The underlying activity that is carried on by the business cannot be a 'prohibited activity' such as dealing in securities or holding investments.
If the above requirements are met the asset can then be considered to be relevant business property, and the value of the asset can be reduced for inheritance tax purposes by either 50% or 100%, depending on the type of asset and who owns it.
In her Will, Mrs Otto makes a gift of her share of G&B to her daughter. Mrs Otto owned her share of G&B for at least two years prior to her death. Mrs Otto's share of G&B was an interest in a business (which is one of the prescribed categories of business asset). For the purposes of BPR, this type of business asset qualifies for 100% relief. This means that if the value of Mrs Otto's half share of G&B was, say, £100,000 at the date of her death, none of the £100,000 would be subject to inheritance tax on her death (irrespective of how significant the value of the remainder of Mrs Otto's estate might be).
In contrast, if Mrs Otto owned equipment in her sole name that she used wholly or mainly for the purposes of her business, that equipment would attract 50% relief for BPR.
How Can BPR Be Claimed?
The personal representatives of an estate can claim BPR by making an application to the Revenue when submitting the Inheritance Tax return (form IHT400), as part of their application for a Grant of Representation (Probate or Letters of Administration) to enable them to deal with the estate.
An individual can also make arrangements in their lifetime to ensure that their personal representatives can take advantage of the maximum available BPR. This can include careful Will drafting and succession planning.
How Can We Help?
VWV's private client and healthcare teams work together to provide tailored advice to you about your Will, the ownership of your share of a business, the terms of your partnership agreement and how those terms might affect the succession of your interest in the partnership. It is important to review your Will and partnership agreement regularly, in particular after significant personal or professional events.