One of the most valuable reliefs from Inheritance Tax (“IHT”) is Business Property Relief (“BPR”). This operates to reduce the taxable value of some assets by 50% and others by 100%.
There are some quirks.
One is in relation to property (land, buildings, machinery or plant) that is owned personally but is used, wholly or mainly, for the purposes of a business that itself qualifies for BPR (which means, very broadly, a trade or profession but not a property investment business). BPR is potentially due in respect of such property at 50%; never at 100%.
But beware: it matters very much whether the business in question is carried on by a partnership (including an LLP) or by a company. In the case of a company, BPR is due only if the company is “controlled” by the person who owns the property in question. By contrast, in the case of a partnership (or LLP), it is sufficient that the person is a partner (or member of an LLP); the size of the interest held does not matter.
One circumstance in which this can be important is when a partnership business is incorporated. Property qualifying for 50% BPR that is owned by a partner who, post-incorporation, does not have a controlling interest in the new company, will instantly cease to qualify for relief when the business is transferred. Procuring that the former partner has a controlling interest in the new company, so as to preserve the relief, will often not be commercially appropriate. An alternative might be to operate the business as a partnership between the company and the individual. However, that will itself raise other commercial and tax issues that need to be considered carefully.
In any event, owning property outside a business (whether partnership, LLP or company) gives access to BPR at only 50% at best. For full relief, it will be necessary for the property to be held within the business, its value then being reflected in the value of the interest in the partnership, LLP or company which will qualify (subject to the other requirements of the legislation) for BPR at 100%.
Injecting personal property into a business would typically be in return for partnership capital or shares in a company, though in some circumstances debt or loan instrument might be considered: each has its own tax (including Stamp Duty Land Tax) implications as well as commercial consequences. But these will need be balanced against the potential prize of BPR at 100% rather than 50% or nothing at all.
For more information, please get in touch with your usual BKL contact or use our enquiry form.