Business property relief: succession planning

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Business Property Relief (“BPR”) enables substantial inheritance tax savings. The relief reduces, or even eliminates, the value of “relevant business property” included in an estate on death. This is why it is important to consider succession planning.

Securing and retaining entitlement to BPR often requires careful management. The benefits of Business Property Relief are often overlooked, and inadvertently lost, when undertaking transactions such as share and security re-organisations or partnership transfers.

Gannons not only delivers taxation advice but also the legal advice and drafting expertise to implement appropriate arrangements. This breadth saves you the costs of managing separate tax and legal advice.

Relevant business property qualifying for 100% Business Property Relief includes:

  • an interest in a business as a partner or sole trader;
  • any unquoted ordinary or preference shares, including shares listed only on secondary markets such as AIM;
  • unquoted securities where the holder has a controlling interest in the company.

Business Property Relief at 50% is available for land, buildings or plant. This can be used by:

  • A partnership if the transferor is a partner or,
  • A company controlled by an individual.

Certain activities are excluded from the definition of relevant business property. Such activities include businesses which “wholly or mainly” deal in shares, securities, land, buildings or holding investments.

Shares in group holding companies may qualify for Business Property Relief, unless the overall group holds interests in subsidiaries whose activities are excluded.

An interest in the relevant business property must be held for a minimum of 2 years before BPR can be claimed. This includes the period of ownership of replacement property or property previously owned by a spouse or civil partner. The property must be a relevant business property at the time of transfer.

Four examples of how planning and proper documentation can secure Business Property Relief, and avoid Inheritance Tax liabilities are:

Business Property Relief case study 1

Two shareholders each own 50% of the ordinary shares of a trading company. They set up life policies so that if either shareholder dies, the other can acquire the deceased’s shares. Here, Business Property Relief would not be available, if the property is subject to a binding contract for sale.

However, Gannons can ensure that Articles and supporting legal documentation achieves the shareholders intentions and preserves Business Property Relief.

Business Property Relief case study 2

An individual owns 100% of the ordinary voting share capital of an unquoted trading company. The 100% shareholder wishes to retire and proposes to sell tranches of shares to a key employee. A new holding company is set up to acquire the tranches. The holding company issues loan notes in consideration for an initial 49% shareholding. The loan notes comprise relevant business property as the original shareholder retains control.

However, further disposals by the shareholder dilute his interest below 50%. This results in a loss of Business Property Relief in respect of the loan notes.

Gannons would rectify this using non-voting redeemable preference shares instead of loan notes. However, this requires care to ensure that entrepreneurs relief is not lost.