Business Property Relief
By Nick Braun PhD
Business owners don’t have to pay any inheritance tax. That’s right, even if your business is worth a billion pounds you don’t have to pay one penny of that to the Government when you die.
Why? Because even left-wing politicians have come to realize that business owners are one of the most important groups of people in the country.
What about the police, nurses and other hardworking souls? Yes they’re extremely important but I like to compare business owners to water and the rest of the country to a tree. I’m sure the Soviet Union had more teachers, engineers and scientists than it could poke a Kalashnikov at. But without entrepreneurial businesses the tree simply withered and died.
The inheritance tax system provides a ‘get out of jail free’ card so that businesses don’t have to be sold or broken up when the owner dies. It’s called Business Property Relief (BPR) and it provides an exemption for ‘business property’. You have to own your business property for just two years to qualify.
So what is business property? If you own a company your shares are the qualifying property. This means you can leave them to your heirs tax free. If you’re a sole trader the individual assets of the business (including the goodwill) are tax free.
Unfortunately most property investors do not qualify for BPR. Hoping the Government would pass up such easy money is as wishul as zebras hoping lions will become vegetarian.
However, shares listed on AIM do qualify. This means anyone who wants to avoid inheritance tax altogether simply has to phone a stockbroker and buy shares in these companies.
Business property relief is complicated and there are many pitfalls awaiting the unwary. It’s extremely easy to lose BPR... often at a time in life when inheritance tax planning is most crucial. Here are some important points to bear in mind:
- If you sell your business you lose your BPR but if you reinvest in a new business (or AIM shares) within three years your business property relief can be maintained.
- If you sell your business, as soon as you have a binding sales contract you lose your BPR. In one famous anecdote the business owner stepped in front of a bus immediately after visiting his solicitor’s office to sign the sale agreement, resulting in a massive tax bill. Insurance can protect you in the period between selling and reinvesting.
- BPR is lost as soon as you retire from a partnership. One way to avoid this problem is to continue in partnership but with a very small profit share.
- When a sole trader retires there is no business left and hence no BPR. The answer here may be to take on a partner and later on ‘semi-retire’.
- If you own shares in a company you can happily retire without any loss of BPR as your position depends on your shareholding and not on your participation in the business. That’s why incorporating your business prior to retirement can be a good way to preserve BPR.
- It’s common business practice for business owners to agree to sell their stakes to surviving owners on their death. These agreements lead to a complete loss of BPR and are a Big No No. Other methods for achieving the same result should be considered instead, such as cross options.
- Because the whole value of a company can be exempt it makes sense to maximize that value. For example, assets owned by you but used by the company (eg a building) only qualify for 50% BPR. It may make sense to transfer these assets to your company eventually.
More information on this subject is contained in the guide How to Avoid Inheritance Tax
