Most business owners are aware of the generous inheritance tax reliefs that make assets used in the business exempt, or partially exempt, from inheritance tax but there are some situations where the relief can be denied.
The most common situation that can arise is where a small business is owned by a number of people and an agreement is entered into to allow succession of the business in the event of a death occurring before retirement. This agreement will normally stipulate that the deceased’s personal representatives are required to sell their shareholding to the remaining shareholders who are also required to buy it.
HMRC however, view this as a binding contract for sale and, where such a contract exists, business property relief is not given.
This problem can easily be avoided by ensuring that any agreement set up for a company grants an option to purchase and sell rather than making the transaction a contractual requirement.
The relief is also not available on family company shares if the company wholly or mainly deals in shares or securities, land or buildings or investments. HMRC apply a 50% test to the definition of ‘mainly’ which covers the capital employed, employee time, turnover, profits and the overall context of the business.
Finally, a business that is too ‘cash rich’ can be denied relief in relation to the cash on the balance sheet at the date of death if it is considered that this is in excess of the amount required for the purpose of the business. To avoid this happening regular board meetings should be held and reasons for cash balances minuted such as for specified future investments or trading needs.
Care also needs to be taken when advising on lifetime gifts and the application of business property relief. The circumstances of the transferee must be taken into account as, if they die within seven years of the gift, it will be necessary to assess whether the relief continues to apply or whether the value of the gift will be charged to IHT.
In order for the relief to be available the following must apply:
• The property has been owned by the transferee since the gift was made and until the death of the transferor
• The property is still classed as relevant business property With a carefully drafted Will and appropriate lifetime planning your clients can ensure the maximum reliefs and benefits are passed to their families and beneficiaries.
