Business Property Relief (BPR) is a relief from inheritance tax, originally introduced to prevent the break-up of a viable business on the death of the owner.
BPR can provide a relief from IHT at up to 100% and is therefore extremely valuable for business owners.
However, steering through the mechanics of BPR can be very tricky and at times frustrating particularly in its application to property businesses.
In this brief, we explore some of the issues at stake and offer some tips to maximise the potential relief. Although BPR can apply to businesses carried on in any form, we concentrate here on companies, where the shares in the company might attract BPR.
Investment vs Trading Activities
One of the fundamental principles of BPR is the distinction between investment and trading activities. Whilst this does over-simplify the rules, such a distinction does allow us to explore the issues for owners of property companies.
One of the fundamental principles of BPR is the distinction between investment and trading activities. Whilst this does over-simplify the rules, such a distinction does allow us to explore the issues for owners of property companies.
A company that carries on trading activities usually qualifies for BPR, whereas a company that undertakes investment activities is usually out of scope.
For example, a property development company would be considered to be trading; a property rental company would be considered to be carrying on investment activities.
Difficulties arise because a single property company might carry on a number of different business activities.
Alternatively, it might not be clear whether a property company carrying on a single activity should be classed as trading or investing. Holiday lettings businesses are a prime example, and as a result we have seen a number of recent cases fought between HMRC and taxpayers claiming BPR.
Mixed Activities
It is common for a single company to undertake more than one business. For example, a company might develop properties to sell at a profit, but may also own a stock of investment properties to receive rental income. This affects a claim to BPR in quite an extreme way, in that the shares in the company either will, or will not, qualify for the relief. There is no middle ground.
At the risk of over-simplifying matters, to work out whether the company as a whole qualifies for BPR we need to look at whether trading or investment activities are the main activities carried on by the company. To do that we need to look at how the following relate to each particular activity:
- Turnover;
- Profit;
- Capital employed;
- Numbers of employees; and
- How much management time is expended on the activities.
No particular heading is more important than any other - the business must be looked at as a whole.
If, on balance, the company carries on mainly trading activities, then the shares in the company will qualify for BPR.
Holiday Lettings
Sometimes, a company will carry on a single business, i.e. holiday lettings. Because the test for BPR is binary, a decision must be made as to whether that business is to be classified as investment or trading. This is not as easy as it might sound.
For this reason, the area of holiday letting businesses has always been a battleground between taxpayers and HMRC. The latter normally takes the approach that these are investments producing income. Recent case law has confirmed that the starting point in any BPR claim is that holiday lettings businesses should be considered investment businesses; however, if the owners of the business provide exceptional levels of services and amenities to guests, this can be enough to tip the business over into the trading camp.
For example, in the recent Grace case the exceptional level of service and amenities offered to guests allowed a successful claim to BPR.
Planning Opportunities
BPR is a valuable relief, and it is important to review your business if you are planning on benefitting from it.
Important points to note include:
- Activities: the activities your business undertakes may affect a claim to BPR and a careful review may need to be undertaken to see whether the relief applies.
- Excess cash: a business accruing cash in excess of its needs may result in the disqualification of these funds from BPR. Where cash is being accrued for genuine business purposes, such as future investment, then clear evidence of this should be maintained to ensure the BPR claim is not reduced.
- Corporate structuring: corporate groups are subject to slightly different rules. BPR can still be claimed in respect of shares in a holding company but, notably, a proportion of the value of the shares can benefit from BPR. The activities of the group's subsidiary companies must be considered to find out whether, and the extent to which, BPR applies.
- Commercial realities: it is important not to let the tail wag the dog. Where commercial interests dictate that the business should be organised and run in a way that might jeopardise a claim to BPR, consider instead alternative IHT planning.
How can we help?
If you own business assets and are unsure whether these benefit from BPR, reach out for advice. Our lawyers are well versed in this area and are able to provide expert solutions to you and your business.