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Business property relief – what is it?

The basics

Business property relief is a tax exemption that can be extremely useful to business owners, and yet many people who run their own business remain unaware of what it is and how it can be of financial benefit to them.

Essentially, it exists to provide the owners of a business with an exemption from the burden of inheritance tax on their company. This means that when the person who owns and runs the business dies, the company does not have to be broken up or sold to pay off the inheritance tax bill, but instead the value of the company can go to the owner’s family or friends. It seems likely that most people will want their loved ones to receive as much of the money as possible should something happen to them, and business property relief can be the most effective way of ensuring that this happens.

The exemption is for anything connected with the company that comes under the heading of ‘business property’. This can mean the actual physical assets of the business such as the buildings or any machinery or equipment used in the running of it, but these are not the only things that count as business property for the purposes of claiming this relief. For example, if you own a business, then it is your shares that are classified as the property, and business property relief can enable you to leave these to your family without them having to pay tax. If the company in question is a small business where you are the sole trader, then all of its individual assets will be eligible for business property relief and can be left tax free to your family.

Is your business likely to qualify?

While this may all sound fairly straightforward, not every company will qualify for business property relief. The relevant business assets must have been held for a minimum of two years before they become eligible for it. While this may appear to be a long time, it is actually much less than the waiting period when it comes to potentially exempt transfers, which is typically seven years.

For shares in a company to be eligible, that company must not have been listed on the stock exchange, but if the business is listed on the Alternative Investment Market, the shares can still qualify for business property relief. It is also important to note that some assets will qualify for this exemption at a 100% rate, while others will only be eligible for a rate of 50%. The buildings, equipment or land used for the running of the business are all examples of assets that will only be eligible for business property relief at a 50% rate. However, even if these are the circumstances that apply to your business, an inheritance tax exemption rate of 50% can still be well worth your while.

Businesses where the profits derive entirely from investments, such as property letting or serviced office businesses, do not qualify for this exemption.

What are the potential problems and risks?

As mentioned above, if the business is listed on the stock exchange, then its shares are not eligible for this exemption, but opting not to float them for that reason can have potential risks.

Companies that are not quoted on any of the major stock exchanges, or that are on the Alternative Investment Market, tend to experience sharper fluctuations in value and this can mean that investors in them end up getting back less than they originally put in. This can also make selling the company in the wake of the death of the owner harder.

If a company holds a significant amount of money in reserve, this can also affect the ability to claim business property relief when the time comes, but not doing so can present financial risks for that business. An article that the Financial Times published a few years ago found that UK businesses were stockpiling money in response to the financial crisis that hit much of the world in 2008. Although the businesses featured in the article were larger public limited companies, a follow-up piece in Money Marketing suggested that the same was likely to be true of smaller firms that are not listed on the stock exchange. Businesses are storing this money as a protection against possible downturns, with many having been unprepared for the 2008 crisis, but doing so can create real problems when it comes to tax exemptions like business property relief.

The Institute of Chartered Accountants in England and Wales made an enquiry to HMRC about whether holding large reserves of money in this way would affect the ability to claim business property relief on that company’s shares. HMRC clarified that, although it understood the reasons for companies engaging in ‘cash hoarding’ of this kind, such financial reserves would still come under the heading of an excepted asset, making the company ineligible for business property relief. There are circumstances where a company can hold a sizeable reserve of cash and still qualify for the exemption, but the owners of the company would have to be able to prove to HMRC that the money had been set aside for a specific business project, not just as a safeguard against future financial difficulties. It will be important to weigh up whether it is better for you to be able to claim business property relief or to keep reserves of money in store, as you cannot do both.

In conclusion, business property relief is a tax exemption that can be a way of ensuring that your loved ones are able to benefit from the business you have built, should something happen to you, rather than inheritance tax swallowing it up. However, there are a number of factors that can prevent it from being eligible, including it being quoted on the stock exchange or having a store of cash built up that cannot be adequately explained to HMRC, so it is wise to seek professional advice.

Posted by Louise
April 2, 2019

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