BPR is available to a business that is wholly or mainly trading. Put simply, this means that if more than 50 per cent of its business activities relate to investment then the whole value of the business will not qualify for BPR.
If the investment activities amount to a small proportion of its overall business activities then investing in recession-proof assets is unlikely to be an issue. Furthermore, the investment assets will qualify for BPR under the overall company structure.
However, if the position is marginal then it may be sensible for a separate company to be set up that carries out investment and is separate from the trading business. This will ensure that it qualifies for BPR and the investment business is hived off.
Some thought needs to be given on how to extract cash from the trading business to fund the investment business. For example, if the trading business declares a dividend to pay cash to shareholders then there will be income tax in the hands of the shareholders at a maximum of (currently) 39.35 per cent.
Family investment companies
A company that holds investment assets for the benefit of family members is a family investment company. A FIC ensures that value is retained and managed centrally, avoiding fragmentation of ownership.
Control can also be maintained by family members acting as directors of the FIC. Although a FIC will not qualify for BPR, the use of a corporate wrapper works particularly well from an income tax perspective if investing in equities, as companies do not generally pay tax on the receipt of dividends from other companies.
If the FIC is funded by way of a loan (repayable on demand) from a parent or grandparent the loan will remain in their estate for IHT purposes, however any growth in the value of the investments will be with the shareholders; that is, the children/grandchildren.
The settlor can also drawdown their loan to the FIC free of income tax or capital gains tax.
A hostile business environment may have reduced the value of a business. As such, parent stakeholders might consider it a good time to make gifts of shares or business interests to their children.
There will, prima facie, be CGT to pay on gifts of business assets that are standing at a gain in excess of the parents' acquisition cost. However, the CGT will be less if the value of those assets is depressed.