For those running their own business, the value of that business may qualify for a valuable relief from Inheritance Tax (IHT) known as Business Property Relief (BPR).
If the business uses premises then the question arises as to whether those premises will also qualify for BPR? This will depend on who owns the premises and the chosen structure that is carrying out the business. The fact that premises qualify for 100% BPR at the outset does not mean that they will continue to do so if the business structure changes.
Let us take for example Claire who carries out her business as a sole trader and owns the premises from which the business is operated. Assuming that the relevant conditions for BPR are met, all of the assets of Claire’s business should qualify for 100% BPR including the premises.
Claire then chooses to go into partnership with her husband Keith. Claire’s interest in the partnership should qualify for 100% BPR (again assuming the conditions are met) but if she continues to own the premises personally then they will only qualify for 50% BPR. Claire may therefore wish to consider transferring the premises to the partnership. The value of the premises, or Claire’s share of it depending on how the transfer has been structured, would then be included in her partnership interest which qualifies for 100% BPR. In making this decision, it would however be important to also consider any other tax implications of the transfer such as Capital Gains Tax and Stamp Duty Land Tax.
Let’s assume that Claire chose not to transfer the premises to the partnership and a few years later chose to incorporate the business so that instead of a partnership interest she owned equal shares in a limited company with Keith. The shares should qualify for 100% BPR and Claire could at this time choose to transfer the premises to the company (again having taken into account the other tax implications of a transfer). The premises would then effectively qualify for 100% BPR as their value would be reflected in the value of the shares.
If however the premises are retained by Claire personally then they would only continue to qualify for 50% BPR if she was treated as controlling the company. This would require her to hold more than 50% of the voting shares. On the face of it as Claire only owns 50% of the shares it would appear that the premises will no longer qualify for BPR. However, when considering the question of control for BPR purposes it is possible to take into account any shares owned by a spouse. Therefore taking into account Keith’s shares means Claire is treated as having control and 50% BPR will continue to apply. It is worth noting that if Claire had incorporated the business equally with someone other than Keith then she would not be treated as having control and BPR would no longer apply to the premises.
Continuing the example, with Claire continuing to own the premises personally, sadly Keith passes away and under the terms of his Will, his shares in the company pass to a discretionary trust of which Claire is one of the beneficiaries. This is an IHT efficient way of proceeding so that Claire can benefit from the trust but the assets will be outside her estate for IHT purposes. In these circumstances however the premises will no longer qualify for 50% BPR as Claire no longer controls the company (we cannot take into account Keith’s shares as they are now owned by the discretionary trust). Although to preserve the IHT savings of the trust the trustees may not wish to exercise their discretionary powers to give all of Keith’s shares to Claire, they could however give her sufficient, say 1%, so that she personally owns more than 50% and again has control and 50% BPR will apply.
It can be seen that any changes to a business structure may impact on the availability of BPR for the business premises and therefore advice should be sought so that steps can be taken to ensure as far as possible that BPR will still apply.
For further information please contact Alice Clewes, Partner at Hay & Kilner on 0191 232 8345 or email Alice.Clewes@hay-kilner.co.uk