BPR in a nutshell
Business property relief, also known as BPR or ‘business relief’, is a valuable inheritance tax (IHT) relief. It can reduce the value of ‘relevant business property’ by either 50% or 100%. This reduction in value can apply to both lifetime gifts and transfers on death, and can result in a considerable IHT reduction.
What is ‘relevant business property’?
The following types of business interests can potentially benefit from 100% BPR:
- businesses owned as sole proprietors
- partnership interests
- unquoted shares (those not listed on a recognised stock exchange)
Some other interests can attract BPR at 50%, including:
- land or buildings, machinery or plant used by a company controlled by the owner
- land or buildings, machinery or plant used by a partnership
- land or buildings, machinery or plant used in certain trusts
- quoted shares where the owner controls the company
Is there a minimum ownership period for BPR?
Broadly, the business interest must have been owned for at least two years prior to the transfer, although there are some exceptions.
Where the business has passed on death, the ownership period can continue in certain circumstances. There is also a specific rule which allows spouses and civil partners to transfer their period of ownership to each other, on death.
Where a qualifying business has been replaced by another (perhaps where a sole trader has incorporated), the replacement business may also immediately qualify for BPR. The rules say that, in certain circumstances, the ownership periods of both businesses may be aggregated.
What about investment businesses, such as FHLs?
The business must be carried on for commercial purposes (not just a hobby) and be trading (or mainly trading). This means that more than 50% of the businesses’ activities must be trading ones – these are activities which are not dealing in shares, investing in land or holding other investments.
The availability of BPR for furnished holiday lets (FHLs) has been a contentious issue for many years and has resulted in numerous court cases. The starting point is that an FHL is merely an investment business, contrasted with, say, a hotel which is far more involved.
However, current law suggests that BPR at 100% can be available where the FHL owner takes an active role in the letting by providing services to the tenants (rather than acting merely as a landlord).
What are the rules for trustees and BPR?
For most trusts (including discretionary trusts), the trustees are treated as the owners of the property. They are subject to charges when the assets leave the trust and also periodic charges (every 10 years). So if a trust contains assets that would ordinarily qualify for BPR (say, unquoted shares) then the trustees will benefit from the relief. This could reduce the IHT charge on these occasions.
For certain life interest trusts, the person with the life interest (often called the ‘life tenant’) will be regarded as the owner. If the life tenant runs the business using assets owned by the trust, there could be BPR at 50%.
Are there any other limitations to be aware of?
BPR will not be available where the business is subject to a contract for sale. This pitfall can often arise on death in respect of partnership interests – often the executors of the deceased partner are required to sell the partnership share to the surviving partners. HMRC views this a ‘binding contract’ and BPR will be denied.
BPR is also denied where the business is being wound up or liquidated at the time of the gift or death of the owner.
It may also be the case that BPR is not given on the entire value of the business. The relief will be restricted where any assets were not used (or mainly used) during the two years prior to the transfer, or required for future use. In practice, businesses with large surplus cash balances may fall foul of this rule.
Is BPR ever clawed back?
Under general IHT principles, a gift made within seven years of death may often give rise to additional charges on that death. Where the lifetime gift consisted of assets that attracted BPR, this may be withdrawn if the person who made the gift dies within seven years and:
- the recipient of the gift no longer owns the business asset, or
- the business asset no longer qualifies for BPR
Where BPR is clawed back, the IHT on the gift will be recalculated without the benefit of the BPR. It is usually the original recipient of the gift (either as an individual or as a trustee) who is liable for this additional IHT.