Your business and your estate: The impact of business property relief

The Internal Revenue Service in the USA has recently brought a successful action against a business owner who gifted his business interest to his children in the 1970s but never filed the appropriate return or paid the tax due. It is estimated that once interest is added, the overall penalty could be $15.5m – more than six times the value of the original gift.

Had the gift been in the UK, the donor may have been able to take advantage of Business Property Relief (BPR) and not now be facing a nasty tax bill. The intention behind BPR is to reduce the risk that, if someone gifts an interest in their business either during their lifetime or on death, inheritance tax charges on their estate when they die may lead to the business failing. It is therefore particularly relevant to people involved in a long-running or a family business.

Depending on the particular circumstances, the asset transferred may be eligible for 100% or 50% of relief – meaning that inheritance tax charges won’t be levied on that part of the donor’s estate. Consequently, it can be a very important relief when it comes to thinking about estate planning.

To rely on BPR, a transfer of an asset must take place, either on death or during the donor’s lifetime. This asset must be “Relevant Business Property”, meaning it has to:

• Fall within a certain category of asset. This includes sole traders or partnerships, shares in an unquoted trading company, and land, buildings or equipment owned by an individual and used by his partnership or a trading company he controls;
• Have been owned by the transferor for a minimum of two years before the transfer (subject to certain relaxations, including rules regarding replacement assets and rules if the asset passes between spouses or civil partners on death); and
• Not be caught out by an automatic exclusion. Certain activities, such as dealing in shares or investments, will not apply for this relief and assets which are subject to a binding contract for sale or is in a business which is being wound up cannot qualify.

Applying BPR is complex and the amount of the relief available is dependent on a number of factors, including the type of asset which is transferred. It is also important to be aware that BPR is subject to claw back if the transferor makes the gift during his lifetime and then dies within seven years, and the transferee no longer owns the asset or the asset no longer qualifies as Relevant Business Property.

BPR is vital in protecting the hard work people put into their businesses and should be considered by anyone who is thinking about gifting their business interests either during their lifetime or upon their death. Don’t waste this valuable relief: make sure you take professional advice when making your Will and considering your estate planning. For more information and to see if BPR could apply to you, please contact the Blake Morgan Succession and Tax team.