Business property relief is an asset exclusion when calculating your estate value for the purposes of inheritance tax, it often means that inheritance tax liability is only worked out on the assets left that aren’t part of a trading business.
For assets or shares in a trading business a full exclusion is available, however if the asset is held outside the business by the owner but mainly used by the business then the exclusion may reduce to 50% of the value or even 0% if the owner does not have control the company or is a partner of it.
The deceased must have held the asset for at least two years prior death for it to qualify and even then there are exclusions which generally prevent relief on businesses that trade in shares, securities, land and buildings. The business will also be disqualified from this relief if it was subject to a contract of sale at the time of death in return for a monetary gain (can exclude share exchanges).
Mr X a widower owns all of company A worth £5m and £1m in property investments, he dies and leaves all of his possessions to his sole surviving child.
With full business property relief the company will be excluded from the estate calculation and the tax due will be on the £1m of property investments minus the £325k inheritance tax allowance, this means Mr X’s child will pay 40% tax on £675k (£1m – £325k) of inheritance equating to £270k.
If Mr X’s company was already in the process of being sold at the time of death this would be a very different story and the inheritance tax due would be on the full £6m estate minus the £325k allowance.
The availability of this relief sparks serious considerations around how a business is structured and the benefits of maximising business property relief can sometimes be outweighed by additional capital gains taxes. Structuring a business efficiently in this regard will depend on your exit plan and is often a difficult area to consider during the early trading years.
If you would like to discuss any of the issues covered above please contact us.