Could Business Property Relief help mitigate your Inheritance Tax?
What is Business Property Relief (BPR)?
BPR was introduced in the 1976 Finance Act in response to the growing number of individuals that were faced with the reality that in the event of their death, the family business they had grown over many years, may need to be sold or broken up in order to pay an inheritance tax (IHT) liability.
Since then, the scope of BPR has evolved to encourage individuals to invest in qualifying businesses, enabling them to potentially reduce a large IHT liability for their beneficiaries. Successive governments have recognised the value of encouraging people to invest in trading businesses regardless of whether they run the business themselves.
BPR provides relief from IHT on the transfer of relevant business assets at a rate of 50% or 100%.
What investments qualifiy for BPR?
Not every investment or interest in a business will qualify for BPR, but the relief will usually be available for:
- Unquoted shares, including shares listed on the Alternative Investment Market (AIM)
- An unincorporated qualifying trading business, or an interest in one, for example a partnership
- Unquoted securities which on their own or combined with other unquoted shares or securities give control of an unquoted company
What are the benefits of a BPR qualifying investment?
Whereas making gifts or settling assets into a trust usually takes seven years to become completely free from IHT, an investment in a BPR qualifying business can be passed down to beneficiaries free of IHT on the death of the shareholder providing it has been held for at least two years.
With a BPR-qualifying investment, the shares are held in your name, which means you keep control of your wealth. Also, investing in BPR-qualifying companies means your investment has the potential to increase in value although as with most investments, there are no guarantees.
BPR-qualifying investments do not use the nil-rate band
So, investors can plan for their nil-rate band allowance to reduce the IHT charge on less liquid assets, such as their home, which can otherwise be difficult to place outside of the estate for tax purposes.
Are there any risks?
As with most investments, there are risks attached to BPR investments. Although the current tax rules provide the above-mentioned benefits, there is no guarantee that this will continue to be the case in the future.
Also, companies may change their BPR qualification status over time which could, in turn affect your entitlement for relief.
Investing in companies typically listed on AIM or unlisted companies are inherently riskier as these companies may not perform as hoped, and in some circumstances may fail completely.
BPR is a well-established relief dating back over 40 years, however, you should keep in mind that the value of an investment may go down as well as up and investors may not get back what they originally put in.
The Financial Conduct Authority does not regulate tax advice.
For more advice please do get in touch with our team.
The information was correct at time of publishing but may now be out of date.