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Most business people know that for family businesses there are generous Inheritance Tax (IHT) reliefs, which generally operate to make assets used in the business exempt or partially exempt from IHT. The reliefs take various forms but have been collectively known as Business Property Relief (BPR), although HM Revenue and Customs (HMRC) have changed the name to 'Business Relief'.
Consider, however, the common situation whereby a business is owned by a small number of people and, in order to preserve the business in the event of the death of a shareholder before retirement, an agreement is made whereby on death the deceased’s personal representatives are required to sell their shareholding to the remaining shareholders, who are required to buy it. Such arrangements are normally funded by writing life assurance policies to cover the purchase.
Regrettably, such an arrangement will prevent the operation of BPR. This is because HMRC regard such an arrangement as a binding contract for sale on death and where such a binding contract exists, BPR is not given. This problem can be avoided by granting each side the appropriate option, rather than making the requirement to buy the shares contractual.
BPR is also not given on family company shares if the company is wholly or mainly engaged in dealing in shares or securities, dealing in land or buildings or making or holding investments. The normal practice of HMRC is to define ‘mainly’ as being ‘more than fifty per cent’. The fifty per cent test is applied to all of:
- the capital employed;
- employee time spent on each activity;
- profits; and
- the overall context of the business.
In other words, a ‘whole business’ view has to be taken. Needless to say, this has led to much dispute over the years.
Lastly, a business which is too ‘cash rich’ can also face a denial of BPR insofar as it applies to the cash on the balance sheet at the date of death if this is in excess of the amount required for the purposes of the company’s business. Cash in excess of that required for the company’s future business is ‘excepted’ from eligibility for BPR. In one case, the shareholders of a company which had £450,000 in its balance sheet, but which was reckoned by the tax inspector to need only £150,000, faced an IHT charge on the ‘excess’ of £300,000. One way which this type of charge may be avoided is to hold board meetings and minute the need for cash balances to be held on the balance sheet in order to finance future (stated) investment and/or trading needs.
HMRC provides guidance on BPR on its website. In 2013, an important case was decided in which BPR was denied for a furnished holiday letting business on the basis that the range of services provided was not sufficient to justify the claim that the enterprise was a 'business'. There have been a number of similar cases over the years with HMRC taking an increasingly tough stance.