Taxation in business - Inheritance Tax (Business Property Re...

Learning Outcomes

After reading this article, you will be able to explain the scope and operation of inheritance tax (IHT) and business property relief (BPR) as applied to businesses. You will identify which assets qualify for BPR, when relief applies, and the main restrictions and exceptions. You will be equipped to answer SQE2-style scenarios concerning IHT on business assets, the treatment of shareholdings, partnerships, and property, and to avoid common errors when advising business owners or their estates.

SQE2 Syllabus

For SQE2, you are required to understand the application of inheritance tax and business property relief as it relates to business structures. In your revision, focus on:

• the basic charge to inheritance tax on business assets (sole trader, partnership, company)
• the fundamental requirements for business property relief (BPR) and how to identify qualifying business property
• the conditions and exceptions affecting BPR eligibility (minimum ownership, trading status, exclusions)
• the effect of BPR on direct ownership, shareholdings, and interests in partnerships or companies
• how to accurately advise on BPR claims and common pitfalls on exams

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. In relation to business property relief, which of the following assets will usually qualify?
   1. A 60% shareholding in a trading company, held for 3 years
   2. A residential let property
   3. Land let to an unrelated trade
   4. A 10% holding in a quoted investment company
2. What is the usual minimum period an asset must be owned before a claim for BPR can be made?
   1. 1 year
   2. 2 years
   3. 5 years
   4. 7 years
3. If a person dies while owning a controlling shareholding in a trading company, which percentage of business property relief normally applies?
   1. 0%
   2. 25%
   3. 50%
   4. 100%

Introduction

Inheritance tax (IHT) can apply when a person dies owning business assets. However, business property relief (BPR) is available to reduce the IHT liability on qualifying business interests. BPR is a critical avenue for reducing the impact of IHT on family businesses, partnerships, and shareholdings in trading companies. This article explains the core requirements, qualifying assets, conditions, and practical application of BPR for the SQE2 exam.

The IHT Charge on Business Assets

Inheritance tax applies to all property within the deceased’s estate, including sole trader businesses, interests in partnerships, and shares in companies. Business owners may benefit from significant relief under the BPR regime, preventing business assets from having to be sold to fund tax.

Key Term: inheritance tax (IHT)
Inheritance tax is a tax charged on the transfer of an individual's estate on death or certain lifetime transfers. The current threshold and rates are set by statute.

Key Term: business property relief (BPR)
Business property relief is a statutory relief from inheritance tax, reducing the value of relevant business assets transferred on death or by lifetime gift.

Qualifying for Business Property Relief

For BPR to apply, all the following must usually be satisfied:

• The asset must be qualifying business property.
• The asset must have been owned for at least 2 years before the transfer.
• The business must not consist wholly or mainly of investment activities.

What Counts as Qualifying Business Property?

The following types of property may qualify for BPR on a transfer:

• A business or interest in a business (including a partnership share) – up to 100% relief.
• Unquoted shares and securities in a trading company – up to 100% relief.
• Controlling shareholdings (over 50% voting control) in quoted companies – 50% relief.
• Land, buildings, or plant/machinery used in a business or a company controlled by the transferor – 50% relief.

Key Term: qualifying business property
Property eligible for business property relief, such as shares in a trading company or an interest in a trading partnership.

Key Term: trading company
For BPR, a company carrying on substantive trading activities rather than wholly or mainly holding investments.

Key Term: controlling shareholding
A shareholding conferring over 50% of the voting rights in a company.

Key Term: relevant business property
Property that meets statutory requirements for BPR, including certain shareholdings, partnership interests, and business assets.

Duration of Ownership Requirement

Generally, relief is unavailable unless the transferor owned the property for at least 2 years before their death or gift. Ownership can include successive owners if both meet the qualifying conditions.

Excluded Assets and Businesses

BPR does not apply where:

• The business is one of dealing in securities, stocks, land, or buildings, or making or holding investments.
• The asset was not used mainly for the purposes of the business in the previous 2 years or was not required for future use.
• The business is subject to a binding contract for sale.

Worked Example 1.1

Amil owns 70% of the shares in a private company carrying on a manufacturing trade. He dies owning the shares after 15 years. The company owns an investment property that it lets out. Do the shares qualify in full for BPR?

Answer:
The shares qualify for 100% BPR only if the company is not ‘wholly or mainly’ an investment company (i.e., not more than 50% of its business is investment activity). If the manufacturing activity dominates, all the shares, including attributable value of investment property, qualify.

Restrictions on Business Property Relief

Investment Companies and Activities

Relief is unavailable if the company’s main activities are holding investments, letting property, or dealing in shares, securities, or land.

Binding Contract for Sale

BPR does not apply if the business property is subject to a binding contract for sale at the date of death or transfer.

Replacement Business Property

Where an individual replaces one qualifying business asset with another, periods of ownership are aggregated if the replacement is made within prescribed time limits (usually 3 years).

Worked Example 1.2

Jyoti held a partnership interest for 5 years, then replaced it with shares in an unquoted trading company 18 months before death. Does BPR apply?

Answer:
If the company is a qualifying trading company and the previous partnership interest would have qualified, BPR is available provided the combined period of ownership is at least 2 years and the replacement is within the permitted time span.

The Level of Relief: 100% and 50%

Full (100%) Relief

This applies to:

• A business or share in a business (e.g., partnership interest)
• Unquoted shares or securities in a trading company

50% Relief

This applies to:

• Land, buildings, or machinery used for business by a company controlled by the transferor
• Controlling holdings in quoted trading companies (>50% voting control)

Application to Different Business Structures

Sole Traders

The entire value of a trading business, not comprising mainly investment assets, qualifies for 100% BPR.

Partnerships

A share in a trading partnership is eligible for 100% relief. Land or property used by the partnership but owned personally only qualifies for 50% relief.

Shareholdings in Companies

Shares in unquoted trading companies are eligible for 100% relief. Shares giving control (over 50% voting rights) in quoted trading companies attract 50% relief.

Property Used in Business

If an individual owns land, buildings, or machinery personally and they are used by a partnership or company they control, only 50% relief is given.

Calculation and Impact of BPR

Where relief is available, the value of the business property is reduced by either 100% or 50% before calculating the inheritance tax charge arising on death or gift. This often results in no IHT payable.

Worked Example 1.3

Samira owns a 55% shareholding in a trading company and also owns a warehouse personally, which the company uses for its trade. On her death, how does BPR apply to her estate?

Answer:
Samira’s 55% holding in the trading company qualifies for 100% relief. The warehouse held personally and used by the company is eligible for 50% relief.

Restrictions Following Transfer or Death

Where property qualifying for BPR passes to a spouse or civil partner, it is usually also exempt from IHT under the spouse exemption, but may later lose BPR if sold or if ceasing to qualify (e.g., business ceases).

Key Term: spouse exemption
Transfers between spouses or civil partners are exempt from inheritance tax.

Loss and Withdrawal of BPR

BPR may be clawed back if the transferee ceases to satisfy the conditions – for example, if the recipient sells the business or it ceases trading within a specified period (currently seven years for lifetime gifts).

Exam Warning

Many BPR exam questions turn on whether the company or partnership passes the trading/investment test. Always check that the business is trading, not mainly investment. Read the scenario carefully to avoid applying BPR where it is not available.

Practical Issues and Common Pitfalls

Revision Tip

Always check ownership periods, trading status, and the use of assets. Watch for property owned outside the business but used by a company or partnership – this often qualifies only for 50% relief.

Key Point Checklist

This article has covered the following key knowledge points:

• IHT may apply to business property on death or certain lifetime transfers.
• BPR provides 100% or 50% relief from IHT for qualifying business property.
• Relief depends on the type of asset, period of ownership, and the nature of business activities.
• Investment businesses, certain land and property, and assets subject to a binding contract for sale do not qualify.
• Failure to meet the trading test or minimum ownership can result in loss of the relief.
• Advice to clients must consider eligibility and restrictiveness of BPR.

Key Terms and Concepts

• inheritance tax (IHT)
• business property relief (BPR)
• qualifying business property
• trading company
• controlling shareholding
• relevant business property
• spouse exemption