Unlocking Inheritance Tax Benefits with Business Property Relief
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only. You should always seek professional advice from an appropriately qualified adviser.
All contents are based on our understanding of current legislation, which is subject to change, any information provided here is only correct at the time of posting.
The Financial Conduct Authority do not regulate will writing, loans, credit cards or some forms of mortgage, tax advice, offshore investments and estate planning.
There is a risk to your capital and you may not get back the full amount invested. The value of investments, as well as the income from them, can fall as well as rise.
Inheritance tax (IHT) can be a significant concern for individuals looking to pass on their wealth to the next generation. The burden of IHT has led many to explore legitimate avenues to mitigate its impact on their estate. One such avenue is Business Property Relief (BPR), a valuable tax relief provided by the UK government. In this blog post, we will delve into the intricacies of BPR, explaining what it is and outlining the potential benefits it offers from an inheritance tax perspective.
Understanding Business Property Relief (BPR)
Business Property Relief is a tax relief designed to encourage investment in certain business assets by providing relief from IHT. It allows individuals to reduce or eliminate the IHT liability on the transfer of relevant business assets, provided they meet the necessary criteria.
Eligible Business Assets
To qualify for Business Property Relief, assets must fall into one of two categories: property used for business purposes or shares in qualifying unquoted trading companies. The relief is typically available at two rates: 100% relief for certain business assets and 50% relief for others.
1. Property used for Business Purposes: This includes real property, machinery, and assets used in a business that the deceased was either a partner in or held an interest in. For instance, a manufacturing facility or a retail store that formed an integral part of a business would be eligible for BPR.
2. Shares in Qualifying Unquoted Trading Companies: If an individual owns shares in a trading company that is not listed on any recognized stock exchange, those shares may be eligible for BPR. A trading company is one whose activities involve the buying and selling of goods or the provision of services.
Duration of Ownership
For assets to qualify for Business Property Relief, they must have been owned for at least two years prior to the transfer or the individual's death. This stipulation ensures that the relief is targeted at long-term business investments rather than short-term speculative ventures.
Potential Benefits
1. IHT Reduction or Elimination:
The primary benefit of BPR is the potential to reduce or eliminate the IHT liability on the transfer of qualifying business assets. This can be a game-changer for individuals with a significant portion of their wealth tied up in a family business or unquoted trading company shares.
2. Preserving Family Businesses:
BPR plays a crucial role in safeguarding family businesses from the impact of IHT. Without proper planning, the tax liability could force the sale of business assets to cover the tax bill, jeopardizing the continuity of the business. BPR allows families to pass on their entrepreneurial legacy without the burden of excessive taxation.
3. Encouraging Investment in Growth Assets:
By providing relief on certain business assets, the government aims to encourage investment in growth-oriented businesses. This, in turn, fosters economic development by supporting enterprises that contribute to employment and innovation.
4. Estate Planning Flexibility:
BPR offers individuals greater flexibility in their estate planning. By utilizing this relief, individuals can strategically structure their assets to minimize the impact of IHT on their estate, ensuring that their wealth is passed on to the intended beneficiaries.
5. Diversification of Investments:
Investors looking to diversify their portfolios can find BPR beneficial. By investing in qualifying unquoted trading company shares, individuals can not only potentially benefit from the relief but also gain exposure to a different asset class that aligns with their risk tolerance and investment goals.
Potential Drawbacks
While Business Property Relief (BPR) offers substantial advantages in mitigating inheritance tax, it's essential to recognize that, like any financial strategy, there are potential disadvantages and risks associated with BPR investments. Here are three key drawbacks to consider:
1. Market Risk and Illiquidity:
One significant disadvantage of BPR investments, particularly in unquoted trading company shares, is the inherent market risk and illiquidity. Unlike publicly traded stocks, unquoted shares lack a readily available market, making it challenging to sell them quickly or at a fair market price. This lack of liquidity can pose a problem for investors who may need to access their funds urgently or in the event of a financial downturn in the specific industry or market segment.
Additionally, the value of unquoted shares can be more volatile and subject to fluctuations, potentially resulting in a decrease in the overall value of the investment. Investors need to carefully consider their risk tolerance and liquidity needs before committing a significant portion of their wealth to BPR-qualifying assets.
2. Changes in Legislation and Eligibility Criteria:
The UK government periodically reviews and updates tax legislation, including provisions related to Business Property Relief. Changes in regulations or eligibility criteria can impact the availability and extent of BPR, potentially reducing the relief or altering the types of assets that qualify. This introduces an element of uncertainty into long-term estate planning, as individuals may need to adapt their strategies in response to evolving tax laws. Staying informed about any legislative changes and regularly reviewing estate plans with a financial adviser is crucial to navigate potential shifts in the regulatory landscape.
3. Business-Specific Risks:
Qualifying for BPR relies on the nature of the business assets, and certain businesses may be more susceptible to external factors such as economic downturns, industry-specific challenges, or changes in consumer behaviour. Investing in businesses solely for the purpose of obtaining BPR without considering the fundamental health and prospects of the underlying enterprises can expose investors to business-specific risks.
If a business fails to meet the eligibility criteria for BPR or experiences financial difficulties, the expected tax relief may not be realized. It's essential for investors to conduct thorough due diligence on the businesses in which they plan to invest.
Conclusion
Business Property Relief can significantly mitigate the impact of inheritance tax on a person's estate. By understanding the eligibility criteria and planning ahead, individuals can leverage BPR to protect family businesses, encourage investment in growth assets, and ensure the smooth transition of wealth to the next generation. Investors should be aware of the potential disadvantages associated with these investments. Market risk, illiquidity, changes in legislation, and business-specific risks require careful consideration and due diligence. Balancing the benefits of tax relief with the inherent risks is crucial, and individuals should work closely with financial advisers to develop a comprehensive estate plan that aligns with their overall financial objectives and risk tolerance.