I am senior partner in the family business with my two sons. I am an 85 year old, still working partner.
Will my sons have to pay inheritance tax on my death? Should I be transferring my shares to them now?
I am loath to do this if not absolutely necessary as it will make this poor old lady feel redundant!
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Senior partner in the firm: Will we save on inheritance tax if I hand over my shares in the family business to my sons now
Heather Rogers replies: I can understand you not wanting to become redundant and to carry on as long as you can!
Depending on the type of business in which you are a partner, there is a relief which might give you some peace of mind: this is known as ‘business property relief’, or BPR.
What is business property relief?
BPR is a relief from inheritance tax that is available on the value of certain business interests.
It can be passed on through a will or even while the owner is still alive, and it covers:
1. A business or an interest in a business, for example a sole trader or a partnership;
2. Any number (no matter how few) of shares (ordinary and preference) in an unlisted trading company;
3. Shares controlling over 50 per cent of the ownership in listed trading companies;
4. Land and buildings or plant and machinery used by the business but owned privately by either a partner in the business or a controlling shareholder.
The relevant business property can include buildings and assets owned by the business itself.
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How much is the relief?
There are two levels of relief.
100 per cent relief for:
– A business or interest in a business
– Shares in an unlisted company
50 per cent relief for:
– Shares controlling over 50 per cent of the ownership in a quoted company
– Privately owned assets, including land and buildings, used by the business but owned privately by a partner or a controlling shareholder
– Land, buildings or machinery used in the business and held in a trust that the business has the right to benefit from
What are the conditions?
In order to qualify for BPR, two conditions must apply.
– A business owner must have held the ‘relevant business property’ for a period of two years.
This can include the period prior to ownership if left by a deceased spouse in their will to their surviving spouse, so if the total period of ownership between them is in excess of two years, relief will apply.
– The business must also be ‘trading’; this means that 51 per cent of the business’s activities should be derived from a trade or vocation.
If 51 per cent of the business’s activities are derived from investments, then the business won’t qualify.
It is an ‘all or nothing’ rule: if 51 per cent or more of the activities are trading, then the whole business will qualify, and if it is the other way round, none will qualify.
The following types of business will not qualify.
– Those where the income is from securities, stocks or shares, land or buildings, or in making or holding investments, (unless it has a trading side which is more than 51 per cent of the activities).
– Not-for-profit organisations.
– Those which are being sold, unless the sale is to a company that will carry on the business and the estate of the deceased will receive shares from that company by way of payment.
– Those which are being wound up, except if it is to enable the business to carry on in some form.
An asset won’t qualify for BPR in the following circumstances.
– It wasn’t being used for the business in the two years before it was either passed on as a gift or as part of the will.
– It isn’t needed in the business in the future.
What about other inheritance tax reliefs?
If you are operating in a farming business where ‘agricultural property relief’ is available, you won’t be able to claim BPR.
However, you may be able to claim BPR on assets not covered by APR, for example equipment, buildings and machinery.
How do you claim business property relief?
When making a claim for BPR as an executor of an estate, you must use the market value of the business or asset, particularly for those on which you are only eligible to claim 50 per cent.
What about gifts in your lifetime?
An estate can still qualify for BPR if the assets were given away during the lifetime of the deceased, but they died within the seven year period.
The same rules apply, but if someone gives away business property or assets, the recipient must keep them as a going concern until the death of the donor if they want to keep the relief.
They can however replace the property or assets – like machinery – with something of equal value if it’s for use in the business.
However, the donor must have owned the business or asset for at least two years before the date it was gifted.
Is capital gains tax an issue?
If someone makes a gift of assets during their lifetime, this is classed as a chargeable disposal of those assets.
If the assets have increased in value during the period of ownership of the person giving them away, the gain will be subject to capital gains tax.
However, if assets are retained until death, and then passed on through the will, their value will be ‘rebased’, so that the beneficiaries of the deceased’s assets receive them at the current market value, tax free.
That rebased value becomes their acquisition cost, if they gift or sell them later.
Sometimes hold over relief can apply to gifts of business assets made during a person’s lifetime.
This is where capital gains tax is not paid at the time of the gift but held over until the recipient sells the asset.
However, the rules on trading are stricter for business assets. The company’s activities must be at least 80 per cent trading for CGT, as opposed to 51 per cent for inheritance tax.
Making your decision
I have given the options for passing on your shares on death and in your lifetime.
I don’t know your circumstances, but I will make the general point that it’s better if a share in the business passes on death from a tax point of view, providing the business qualifies for relief.
I wrote about when it is a good idea to hire an accountant here. One of the scenarios is that you have a business to sell or are retiring from one.
You might have a company accountant whom you can consult about this matter, but if you need a professional to give you personal advice the article linked to above explains how to find someone with the right expertise.
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Tax expert Heather Rogers answers our readers’ questions
Heather Rogers, founder and owner of Aston Accountancy, is our tax columnist. She is ready to answer your questions on any tax topic – tax codes, inheritance tax, income tax, capital gains tax, and much more.
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If Heather is unable to answer your question, you can find out about getting help with tax here, including sources of free professional advice if you are elderly and/or on a low income.
You can also contact MoneyHelper, a Government-backed organisation which gives free assistance on financial matters to the public. Its number is 0800 011 3797.
Heather gives tips on how to find a good accountant here, including when to seek help, hiring the right type of firm and typical costs.