BPR and changes to the business structure

Produced by Tolley
BPR and changes to the business structure

The following Trusts and Inheritance Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • BPR and changes to the business structure
  • BPR and incorporation
  • Incorporation of business in exchange for shares
  • Incorporation of a business via gift or sale of goodwill at undervalue
  • Sale of goodwill to the company at full value
  • BPR and reconstruction
  • Applying the two-year ownership rule on a company reconstruction
  • BPR and liquidations
  • Effect of ceasing to trade

BPR and incorporation

In the current tax climate, many sole traders, partnerships and limited liability partnerships (LLPs) are seeking to incorporate to shelter their surplus trading profit from penal income tax rates.

However, when an existing unincorporated business transfers its trade and net assets to a new company, there may be a loss of business property relief (BPR) depending on how the incorporation was structured.

It is important to note that if a business owner makes a chargeable transfer (which could be on their death) at the time the various assets are sold to the new company, the normal BPR denial for binding contracts for sale will not apply (see the BPR overview guidance note).

This section considers the inheritance tax BPR implications for each of the main methods of incorporating an existing qualifying trading business.

For further guidance on incorporating a business, see the Introduction to incorporation guidance note in the OMB module, and other notes in that sub-topic.

Incorporation of business in exchange for shares

Such incorporations will normally be within TCGA 1992, s 162 (which offsets the consequent gains on chargeable assets, such as goodwill, against the market value base cost of the shares issued in exchange). The mechanism for the deferral of the capital gain is discussed in the Capital gains tax implications of incorporation guidance note in the OMB module.

From a BPR perspective, the new consideration shares in the company should often immediately qualify for BPR as they will be considered to be replacement property.

This is because the new shares would constitute relevant business property within IHTA 1984, s 105(1)(bb), and they would have replaced previous relevant property within IHTA 1984, s 105(1)(a), being the (share of the) net assets of the business including goodwill.

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