Business property relief (BPR) is an important relief which fully exempts certain assets from inheritance tax (IHT). One of the most common asset classes to which BPR applies is unquoted shares (including AIM shares) in a trading company. The one small caveat is that as a general rule the assets have to have been held for two years to benefit from the relief.
Two years is often an acceptable holding period but there are circumstances where the relief can be obtained without meeting that requirement. The recent case of Vinton and another (Executors of Dugan-Chapman) v Revenue and Customs Commissioners shows that if there is a rights issue under which further shares are offered to all shareholders and the shareholder takes up his or her issue then, provided the allocation is linked and proportionate to shares already held by the shareholder, the new shares fall within the reorganisation of share capital rules and qualify immediately for full relief from BPR.
This involved a shareholder claiming BPR who had previously provided a loan of £300,000 to the company and then took up a rights issue, paying for it by capitalising the loan. Had the shareholder not taken up the rights issue, the £300,000 loan would have remained an asset in her estate which did not qualify for BPR and so been taxable at 40% on death. Consequently, taking up the rights issue against the loan potentially saved £120,000 inheritance tax.
In contrast to the above the deceased had also taken up other shares in the rights issue which had been renounced by another shareholder. They did not qualify for immediate BPR as the right to buy them did not arise as a result of her ownership of her existing shareholding. Furthermore, relief was not available on shares that the deceased had subscribed for in the normal way outside the rights issue. Both these classes of shares would have to have been held for two years to qualify in the usual way.
There are circumstances where this principle could be useful in ‘death bed planning’. For example a terminally ill wife may want to consider taking up a rights issue (in respect of shares held for over two years) in the family company. Provided that these rights flow from shares that she owns then it should be possible for the rights shares as well as the original shares to qualify for full BPR.
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