Unlocking the benefits of business relief

Understanding business relief

Business relief (previously known as business property relief (‘BPR’)) works by reducing the amount of inheritance tax payable on certain business assets by either 50% or 100% depending on the nature of the asset and how it is used. Business relief was originally introduced to ensure that following the death of a business owner, a family-owned business can survive as a trading entity without having to be sold or broken up to pay inheritance tax liability.

Business relief reduces the value of a business or its assets when working out how much inheritance tax has to be paid. You can get business relief of either 50% or 100% on some of an estate’s business assets, and it can be available on transfers during lifetime or on death.

Eligibility and conditions

100% business relief is available on:

• A business or interest in a business; and
• Shares in an unlisted company.

Generally speaking, 50% business relief can be available on:

• Land, buildings or machinery owned by an individual and used in a business in which they were a partner or held a controlling interest.

Business relief is not available on:

• Investment businesses: relief is not available for businesses ‘wholly or mainly’ dealing in securities, stocks and shares, land or buildings, or making or holding investments. It must be a trading business. This means relief is not available to landlords with rental property portfolios and/or furnished holiday lets. 
• Certain ‘excepted assets’ (which can include excess cash balances); and
• Businesses that are subject to a binding contract for sale.

Importantly, the relief is only available if the deceased owned the business or asset for a period of at least two years before their death. Married couples and civil partners can effectively ‘transfer’ their period of ownership to the surviving spouse provided certain criteria are met.  

Specific criteria apply for replacement business property (i.e. where a qualifying business asset is sold and is replaced by the purchase of a new qualifying business asset within three years). However, if the individual dies before the replacement asset is purchased, business relief will be lost.

Strategies for maximising business relief

On the death of a business owner, business relief must be claimed by the executors when they submit details of the estate to HMRC before applying for a grant of probate.

Careful lifetime planning can help to ensure that any available business relief is maximised. Potential options to consider are:

• Using a Will structure which would maximise the use of business relief. For married couples and civil partners, Wills which simply leave entire estate to the surviving spouse can ‘waste’ the opportunity of using any available business relief.  This is especially so if the surviving spouse is not involved in the running of the business. If the estate is to be split between the surviving spouse and children, it may be more tax-efficient for the assets which qualify for business relief to directly pass to the children, or into a Trust, on the first death.
• Lifetime gifts. Business owners do not necessarily have to hold onto qualifying assets until their death to obtain relief. For those wishing to give away business interests during lifetime, this could be achieved by way of an outright gift to an individual or by creating a Lifetime Trust.  However, the person giving away the business assets (‘the donor’) cannot retain any interest in them for the gift to be effective for inheritance tax purposes. For example, they could not continue to receive any income from the business. It is also important to note that business relief can be subject to clawback if the donor dies within seven years of the gift and the recipient is no longer operating the business.  This can result in additional inheritance tax being payable on the donor’s estate.
• Seeking professional investment advice on business relief qualifying assets and replacement property.

Where can Weightmans assist?

Business relief can provide a multitude of advantages, but advice should be sought as to whether relief applies to your particular set of circumstances. The law is constantly changing and the legislation may be subject to further change in the future.

Weightmans private wealth team can help to guide you through the estate planning process.