Business Property Relief (BPR) is valuable inheritance tax (IHT) relief which broadly applies to unquoted shares in trading companies.
If a company is wholly or mainly trading (subject to certain excluded activities) there is scope for it to benefit from 100% BPR.
Any excess cash within the company would be excluded from this relief and still be subject to IHT in the event of the shareholder’s death.
There is a general rule that shares need to be held for two years in order to qualify for relief. However new shares which are acquired by way of a rights issue are deemed to have been held for the same period as the shares to which the rights attach.
Mavis is critically ill and owns shares in a BPR qualifying company which she has held for many years. She is considering providing £200,000 to the company to allow it to acquire new trading premises. She could do this by either loaning the funds or by way of a rights issue (whereby she would acquire additional shares to augment her existing shareholding).
Assuming that Mavis dies within 2 years of providing these funds to the company there would be a difference in the IHT position depending on whether she provided funds by way of a rights issue or by way of a loan.
If the funds had been provided by way of a loan then this would still be in Mavis’s estate and subject to IHT at 40%.
If the funds had been provided by way of a rights issue then the rights shares would take on the ownership history of the original shares and she will be treated as having owned these shares for over 2 years and they should therefore fully qualify for BPR.
Great care should be taken over the mechanics of the rights issue and specialist legal advice should be taken in connection with this.
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