Business Property Relief (BPR) is a valuable relief which can provide full relief from IHT in respect of trading companies. In detail, the rules work as follows:
1. BPR will not apply to ‘excepted assets’ which are assets which are neither used wholly or mainly for the purposes of the business during the previous two years (or entire period of ownership if shorter than two years) or that is required at the time of the transfer for the future use of the business. Therefore these assets need to be stripped out before considering the position with business activities.
2. With the remaining value, there is an assumption that BPR will apply, unless it can be demonstrated that a business is mainly one of investment.
Example 1 – Investment activity
Manufacturing Co has always followed a policy of investing accumulated profits in property. Fred, the 100% shareholder, died on 20 January 2022 and there was a need to ascertain the IHT position at that date. It was determined that the net trading assets and goodwill were worth £4m whereas its portfolio of investment properties was worth £5m. On this basis it could be argued that the business is mainly one of investment and therefore the full £9m would be subject to IHT.
Example 2 – Excepted assets
The facts are the same as in Example 1, although instead of investment property there was £5m of excess cash reserves which had built up. In this case the cash reserves would be excluded from BPR and the value of the trade would benefit from BPR. Therefore £5m would be subject to IHT.
Example 3 – Investment activity and excepted assets
Here there is a £4m trade, £3m of investment property and £2m of excess cash. In this case the cash reserves would be excluded from BPR and the value of both the trade and investments would benefit from BPR (because the business is not mainly one of investment). Therefore only £2m would be subject to IHT.
This all shows that from an IHT perspective it will sometimes be preferable to hold excess cash rather than investments. This will be the case when the investments would have the capacity to turn the company into one with a business, which is mainly that of investment.
Forbes Dawson view
Managing the IHT status of a company can be quite precarious, because a company which is predominantly trading (with subsidiary investment business) will often benefit from 100% BPR but this will reduce to 0% BPR if the investment side of the business gains the upper hand. If there is a risk of the investment side taking over, then there can be advantages in liquidating some of the investments to create excepted assets, which, although subject to IHT themselves will not ‘contaminate’ the remaining assets. Alternatively, investments could be sold to another (non-group) company to create an intercompany debtor which could be treated as an excepted asset. Better still, if it can be argued that proceeds from the investments are being earmarked for investment in the trade, then BPR should be available on everything. There is a lot to think about here!
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