Business property relief

The rate of relief is either 100 per cent for a business or an interest in a business (so, a sole trader or a partner should qualify) and unquoted shares in a trading company or 50 per cent for land, buildings or plant and machinery owned by an individual and used in his partnership or a trading company he controls.

Generally the business must be trading and its property must be owned for two years in order to qualify for BPR.

In the early days of a business, BPR may not necessarily be on the radar but as the business grows and becomes more valuable it certainly should be. The most common BPR mistakes made by business owners are as follows: Large cash balances Two partners, Holly and Ivy, built up a successful toy business, ‘Happy Times’, worth £1m. The business was a trading business, buying and selling toys, and qualified for 100 per cent BPR.

Unfortunately Holly and Ivy allowed a lot of cash to build up unnecessarily in the business bank account. They were unaware that if an asset is neither used for the purposes of the business nor required for the future use of the business, it will not qualify for BPR.

Holly and Ivy wanted to ensure that when one of them died the partnership would pass to the survivor.

They drew up a 'buy and sell' agreement, which stated that on the death of one partner the survivor will buy out the interest of the deceased and her executors must sell it to the surviving partner. As a result of this binding contract for sale, BPR would be denied.

If, instead, the agreement had provided an option for the surviving partner to buy the deceased's interest then BPR would have been available.

The same comments apply to shareholders.

Property used by the business, but not owned by the business Holly alone owned the shop from which the business traded and allowed the partnership to use it rent free.

If Holly were to die, BPR at 50 per cent would be available and half the value of the shop would be liable to IHT. If, instead, Holly had made the shop a partnership asset, BPR of 100 per cent would have been available.

A controlling shareholder who owns a property used in a private trading company is in a similar position.

Withdrawal of BPR on lifetime gifts BPR is also available on lifetime gifts but even if the conditions are met at the date of a gift, the relief will be withdrawn unless the property is still owned by the recipient at the date of the transferor's death.

Ivy gave some of her partnership interest to her son, Noel, who sold the interest a few years later.

Ivy died within seven years of making the gift. As Noel did not own the interest at the time of Ivy's death, BPR was denied and Ivy’s gift became subject to IHT.

Wasting BPR in your Will Ivy’s Will left all her estate to her husband, Nick. While there was no IHT to pay on her death because of the spouse exemption, it did mean BPR was wasted.

As is often the case, Ivy’s interest in the partnership was sold following her death and now Nick holds lots of cash which will be subject to IHT on his death. Ivy could have settled her BPR property on a discretionary trust in her will for beneficiaries including Nick.

If her interest in the business were sold, the cash proceeds would fall into the trust and be outside Nick's estate for IHT purposes. However, he could have access to the cash if he needed it.

A further refinement is the ability to 'double dip'. If Nick were cash rich, he could buy Ivy's partnership interest from the trust.

In this way he would reduce the cash in his estate and replace it with property eligible for BPR on his death. BPR is a valuable relief for business owners. It could exempt a whole business from IHT whether it is worth £10,000 or £100m. It is important to ensure your business benefits from this relief by carrying out a BPR audit and ensuring it is dealt with appropriately in your will.