Business Property Relief – The Importance Of Reviewing Your Documents

Business Property Relief (BPR) is a relief that business owners rely on when considering the succession of their business. In a nutshell, BPR applies to reduce the ‘transfer value’ of a qualifying asset for inheritance tax purposes.

For example, when you die, Inheritance Tax is charged on the value of your estate over and above your tax-free allowances at the rate of 40%.

If you own a business interest at your death and that qualifies for BPR then the value of this can be exempt from Inheritance Tax. The tax saving can therefore be substantial.

What are the eligibility requirements of BPR?

There are several eligibility requirements but many trading business interests owned by sole traders, partners in a partnership and shareholders in an unquoted company will qualify for this Inheritance Tax exemption if the interest has been held for a minimum number of two years.

However, the exemption is not available if your business consists wholly or mainly of dealing in securities stocks or shares, dealing in land or buildings, or making or holding investments.

It is therefore very important for the business owner to review their Wills to ensure that they are drafted in the most tax-efficient manner.

BPR and corporate documents

It is also just as important for business owners to consider any corporate documents that they have in place, such as any Shareholder Agreements.

BPR will not be available where there is a binding contract for the sale of the business interest or asset. This is because BPR does not apply to cash and HMRC takes the view that a binding contract for sale effectively leaves cash in the estate rather than the business asset itself which the relief attaches to.

Business owners are therefore encouraged to review their legal documents to make sure that they do not contain a ‘buy and sell’ clause i.e. the executors of the estate are obligated to sell the shares to the surviving business owners who in turn are obliged to buy them.

It is understandable that when drafting their legal documents, business owners like the option to have a clause of this nature in their agreements because it provides certainty for the deceased’s beneficiaries and the ongoing business owners. However, HMRC will scrutinise all legal documentation and will deny any claim for BPR if such wording is included. This can be detrimental to the estate, as the value of the business interest can be substantial thus potentially triggering a large, unexpected tax bill.

Seek specialist legal advice

At Nelsons, our expert Wills and Probate team work closely with our Corporate team to ensure that there is a joined-up approach when advising business owners about their succession plans.

Careful drafting of Wills and Shareholder Agreements can ensure that the intended wishes for succession are fulfilled without jeopardising valuable reliefs available to the estate on death.