As a shareholder or partner in a trading company, the value of your interest in the business will be covered by 100% Business Property Relief (BPR) and therefore not subject to inheritance tax (IHT) on your death. This valuable relief is designed to prevent the sale of businesses to fund IHT payments on the death of a business owner. However, to protect this relief, the right business structure is crucial; specifically how the disposal of shares or interest of a deceased are dealt with, in particular that there is no binding contract for sale by the deceased’s executors of the interest in the business.
BPR allows you to leave any interest in the business to your spouse and family through a discretionary trust arrangement set up through your will – a popular method of IHT planning because of the considerable IHT savings that can be made. But this tax planning can come to naught if the shareholder/partnership agreement or company memoranda and articles prohibit an interest in the business from passing into a discretionary trust. Therefore any prohibitions need to be assessed prior to undertaking a tax planning review. This should not prove controversial as the business owners would still have the option of buying the business from the estate but in a tax efficient manner for the deceased’s family.
You may need to review the ownership of the property or premises from which you run your business, not least as they may be one of the business’s most valuable assets. If owned as a company or partnership asset they will attract 100% BPR; however, this reduces to 50% if you own them. The partnership or shareholders’ agreement can regulate how the ownership of the property is split between the parties to reflect the capital contribution. In addition, a partnership can consider converting to limited liability status to protect any property or premises from liability as a result of another partner’s actions.
Borrowings should be secured against any non-trading company property rather than the trading premises. This is because a trading company will attract 100% BPR whereas an investment property attracts no BPR and therefore the full value will be subject to IHT. However, any borrowing secured against the investment property will reduce its value for IHT purposes.
BPR is also available on trading companies. However, a word of caution: if you run a trading company and a non-trading company under one company or partnership name and the non-trading company’s income exceeds that of the trading company, you may jeopardize the availability of BPR on the trading company. Therefore you may want to consider two separate company structures to protect the BPR on the trading company.
Therefore the way a business is structured is fundamental to protecting and maximising the IHT BPR. A review of the shareholders/partnership agreement and company memoranda would soon reveal the tax efficiency of the business structure.
This article was first published in NewsBrief, Summer 2008.
For more information or advice on business structures for IHT relief, please contact John Rouse.
