Inheritance tax is charged on a UK-domiciled person’s worldwide assets on their death.
As the total value of estates above £325,000 is taxable at a rate of 40 per cent, many may consider taking advantage of the various reliefs available to reduce the tax bill and consequently increase their beneficiaries’ inheritance.
One of the most valuable reliefs for business owners is business relief, formerly known as business property relief.
Executors of an estate, such as those in the recent case of Butler & Others v HMRC, who might have expected BR to apply to a business held in the estate, could find themselves landed with an unexpected IHT liability — either because the conditions of BR have been misunderstood or have not been met. Therefore, it is important to understand the conditions that must exist for BR to apply.
Relevant assets
Assets that may qualify for 100 per cent relief include a business, an interest in a business (such as a sole trader or partnership), or unquoted shares in a trading company. Assets that qualify for 50 per cent relief include controlling shares in a listed trading company, land, buildings and machinery either owned by an individual and used in a business or partnership they control, or a business held in a trust from which they benefit.
To qualify for BR, the assets or interest in a business must have been owned by the deceased for at least two years prior to their death. Relief should still be available when one qualifying asset is replaced by another. For example, a new item of machinery to replace another that has served its purpose is likely to qualify for the relief, even if the deceased died within two years of that purchase.
BR will not apply if there is a binding contract of sale in place. This includes instances where an owner of a business dies and a remaining owner has a right to buy the deceased’s share of the business. However, consideration should be given to a “cross-option agreement” – which is a legal contract between the shareholders of a private limited company that facilitates the sale or purchase of a shareholder’s shares should they die.
Where a cross-option agreement exists, the option to buy the deceased’s share of the business can only be exercised after death. In these circumstances, BR is available despite the estate receiving the sale proceeds.
Excepted assets
A business may have excepted assets, such as cash, that cannot be demonstrated as being needed for the purposes of the business. Excepted assets are ignored when calculating the value of BR available and can significantly reduce the relief. For an asset not to be treated as excepted it must satisfy two tests:
