Business property relief (BPR) and the ‘binding contract trap’

The issue

BPR is an important inheritance tax (‘IHT’) relief which many business owners will rely on as part of their estate planning.

To recap, where relevant business property, such as shares in an unquoted trading company or an interest in a trading business/partnership has been held for a minimum of two years, the asset will be exempt from IHT.

BPR will not be available for the above-mentioned assets when there is a binding contract for the sale of the asset. This is because BPR does not apply to cash and HMRC’s view is that a binding contract for sale is effectively the same as cash.

Some executors of estates are finding that HMRC deny BPR due to the ‘binding contract’ trap. This is due to the presence of a ‘buy and sell’ clause within legal documents, such as shareholders’ agreements, which creates a binding contract, obligating the estate to sell the shares/interest to surviving business owners who are in turn obligated to buy them. This is a most unwelcome shock to the estate as the values involved can be huge.

Why have these clauses?

Partners, directors and shareholders will often have such arrangements in place because they provide certainty and security for both the deceased partner’s beneficiaries and the surviving business partners. It means:

• The beneficiaries of the estate know they can sell and will receive money for the asset;
• The surviving business partners know that the shares cannot be sold to a third party. 

HMRC’s view is that such agreements constitute a binding contract for sale and therefore deny the availability of BPR.

Forbes Dawson View

The availability of BPR should be an important consideration when drafting shareholder/partnership agreements and care should be taken to avoid this trap. HMRC have conceded that they will generally accept that the following do not create a binding contract for sale:

• Accruer clauses: the deceased individual’s partnership interest accrues automatically to the surviving partners who are obliged to pay the estate a pre-determined price.
• Options clauses: the surviving business partners have the option, and not an obligation, to acquire the shares/partnership interest from the deceased individual’s estate.

With careful wording it is possible to avoid the binding contract trap and therefore maintain the availability of BPR, while providing the surviving business owners with the protection and control they desire. As is generally the case, the devil is in the detail, as commercially there appears little difference between an accruer and a binding sale contract clause. This is a good example of where something which is not obviously about tax can have devastating tax consequences if appropriate advice is not taken.




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