Where a UK domiciled individual’s estate is valued at over £325,000 (this is called the Nil-Rate Band, or NRB), their estate will be subject to Inheritance Tax (‘IHT’) at up to 40% on the value over the threshold. Where the NRB is not used in its entirety (for example, all assets pass from one spouse to another on death), the unused NRB passes to the estate’s beneficiaries.
In addition, a new ‘Residence NRB’ provides a higher threshold to allow family homes to pass from one generation to the next. The total tax-exempt amount could therefore be up to £1million. However, Business Relief (or Business Property Relief) for IHT purposes helps ensures businesses and business assets can pass to others free of UK IHT.
Even if an individual personally has net assets falling below the threshold, not making use of the available reliefs may mean that the NRB passed on to a surviving spouse will be unnecessarily restricted. Ultimately, this means children, family and other heirs may receive a lower inheritance than if (often straightforward) planning had been undertaken.
Business Relief for IHT (or Business Property Relief)
Business Property Relief is a relief that provides up to 100% relief against IHT on business assets, providing certain conditions are met. Business Property Relief for IHT applies to business property including, but not limited to, shares in unquoted companies. Many taxpayers will be familiar with the various “trading company” tests used for other taxes, but the IHT legislation requires that the company must not be “wholly or mainly” an investment company to qualify for Business Property Relief. This is a subtle but important distinction.
Other events potentially giving rise to an IHT exposure include ‘Chargeable Lifetime Transfers’, perhaps most commonly transfers of assets into certain types of trust. The IHT regime for trusts is complex, but broadly there are three instances of potential charge:
- On the initial transfer of assets into the Trust;
- On each ten-year anniversary of the Trust’s creation; and
- On the distribution of assets from the Trust to a beneficiary.
Business Property Relief is available for IHT in these instances, subject to meeting the relevant conditions. Although the conditions are broadly the same as those for individuals, there are certain nuances that must be fully considered.
What Qualifies for Business Relief?
The following assets may qualify for Business Property Relief:
- A business or an interest in a business;
- Unquoted securities which on their own or combined with other unquoted shares or securities give control of an unquoted company;
- Unquoted shares, including shares listed on the Alternative Investment Market (‘AIM’);
- Quoted shares with sufficient ownership so as to give control of the company; or
- Land or buildings, machinery or plant used wholly or mainly for the purposes of the business, with specific additional considerations relating to such assets held in trust.
The assets must have been held for at least two years up to the date of death, or other IHT event, to qualify for Business Property Relief for IHT. Depending on the nature of the asset, relief will be available at either 100% or a reduced 50% rate against the value of the asset in calculating the IHT liability of the estate.
There have been a number of cases through the Tax Tribunal and Courts regarding the availability of BR, particularly in relation to Furnished Holiday Letting businesses. These cases have been of notable contention and with mixed outcomes. Even where substantial services are provided, above simply holding a property with little or no input, the BR position is extremely unclear.
Advice must be sought in each individual case in this regard.
Potentially Exempt Transfers (‘PETs’)
Gifts made during an individual’s lifetime that are not Chargeable Lifetime Transfers may either be exempt under certain conditions, or otherwise Potentially Exempt Transfers. PETs are so called because they will generally only be subject to IHT if the donor (the person making the gift) dies within seven years.
If an individual makes a gift of business property during their lifetime, then, regardless of when the donor passes away, the recipient will not be liable for IHT if the following conditions are met:
- if a business or interest in a business, the recipient must keep the property as a going concern until the donor passes away;
- if the gift is an asset (e.g. plant or machinery) used in a business and the asset is subsequently disposed of, the proceeds must be reinvested in another BR-qualifying asset.
Estate/Will Administration
The executor of the will or administrator of the estate, should claim Business Relief on valuation of the estate and should complete form IHT400 (Inheritance Tax account) and schedule IHT413 (Business or partnership interests and assets). If in doubt, we recommend that the IHT return is reviewed by an adviser to ensure all possible reliefs are claimed and business relief for IHT is not overlooked.
Non-Doms and Offshore Trusts
The UK tax legislation for individuals who are domiciled (by origin or choice) outside the UK, and for non-UK resident trusts, is extremely complex and has undergone extensive changes in recent years.
Although BR can still be an extremely valuable relief for such taxpayers holding UK assets, there are additional complexities that must be taken into account. In particular, the NRB may be restricted for ‘non-doms’ and this may affect their planning decisions.
Advice from a non-dom and offshore trust specialist must be sought, as there are considerable consequences for making errors relating to offshore matters.
How Pure Tax can help
As individuals and families become ever more mobile and entrepreneurial, it is vital that any UK domiciled individuals with UK IHT exposure consider the options available to them to optimise their position both during lifetime and upon death. This should be considered in the wider context of a family’s longer-term planning around succession and wealth preservation, especially Business Relief for IHT planning.
BR can be an extremely invaluable relief, so clarifying its availability would be a valuable exercise for individuals and trustees alike. This can be incorporated into our ‘Wealth Health Check’, providing a useful foundation on which to build a meaningful and long-term succession plan.
With expert knowledge on non-doms and non-UK trusts, we can provide tailored advice for international clients with UK assets or interests. In the first instance, we would be pleased to provide a copy of our flyer on the changes to the taxation of non-doms and offshore trusts, which goes into greater detail on some key areas to bear in mind.
HOW CAN PURE TAX HELP?
At Pure Tax our Tax Investigation & Disclosure specialists are industry recognised and have dealt with hundreds of contentious situations with HMRC over the years. We are adept at managing interactions with the tax authorities to ensure that the investigation and disclosure processes run smoothly and that your interests are best protected.
