One of the most common taxes in the UK is Inheritance Tax (IHT). The Treasury raised £5.2 billion in IHT receipts in 2017/18 with the figure set to increase to more than £7 billion in the next few years.
However, many consider IHT a ‘voluntary tax’ considering all the reliefs and allowances that are available. One of these is Business Relief (previously called Business Property Relief), which many families are using to reduce their IHT liability. Considering that The Guardian reports almost £700 million is saved each year through using Business Relief, is it something you can take advantage of?
What is Business Relief?
When it comes to calculating an IHT liability, any ownership of a business is included in the estate. When working out an IHT bill, Business Relief reduces the value of a business or its assets.
You can get Business Relief of 100% on:
- A business or interest in a business
- Shares in an unlisted company
You can get Business Relief of 50% on:
- Shares controlling more than 50% of the voting rights in a listed company
- Land, buildings or machinery owned by the deceased and used in a business they controlled or were a partner in
- Land, buildings or machinery used in the business and held in a trust that it has the right to benefit from
Business Relief can only be obtained if the deceased owned the business or asset for at least two years before they died.
A recent report found that families were saving £700 million a year by using Business Relief. The campaigning group, Tax Justice UK, found that 234 families with more than £1 million in business assets, shared £458 million in relief in the 2015/16 year, thanks to Inheritance Tax breaks.
What sorts of businesses qualify for Business Property Relief?
It’s important to remember that Business Relief is not available for all companies. For example, it is not available in respect of a business or shares in a company that is not carried on for gain (not on a commercial basis), is subject to a contract for sale, or is in the process of being wound up. Not-for-profit organisations are also exempt from relief.
Additionally, you cannot claim Business Relief if the business ‘wholly or mainly’ deals in securities, stocks or shares, land or buildings or in the making or holding of investments.
Finally, a business which only generates investment income will not attract Business Relief, so this excludes:
- Property dealing companies
- Services office businesses
- Residential/commercial property letting businesses
There are several types of business that sit on the borderline. Here, the nature of the services they provide will determine whether Business Relief is available. Such businesses include:
- Holiday lettings
- Property management
- Caravan parks (where there is letting, holidays and caravan sales)
- Estates where the business is a mixture of farming and letting
- Property development if there is also significant letting and dealing
There have been occasions where borderline Business Relief cases have ended up at tribunal. Here’s one well-known example.
The Vigne case
As we saw above, Business Relief is not available where a business is found to be wholly or mainly operating as an ‘investment’ rather than a ‘trading’ business.
As the value of business assets can be substantial, and that they may enable an individual to significantly reduce their IHT liability, it’s perhaps no surprise that there have been several cases between taxpayers and HMRC.
One such case was Vigne v HMRC. Here, the First-tier Tax Tribunal (FTT) had to consider whether Business Relief should be given in respect of 30 acres of land used in a livery stable business run by the deceased (Mrs Maureen Vigne).
HMRC argued that while Mrs Vigne undisputedly carried on an active business, the business was mainly of an investment nature and consisted of nothing more than the letting of land for the use of others (horses).
However, the FTT found that the business involved much more than simply the letting of land. Mrs Vigne’s business provided valuable additional services that were not typical of lower levels of livery. These additional services included:
- Feeding the horses with hay in winter, which was grown on adjacent land
- Administering worming products
- Removing horse manure from the fields
- A daily health check of each horse
The FTT, therefore, granted Business Relief, saying: “…any objective observer who had visited the site… would have concluded that a business was being run from …the land …. and that no properly informed observer could or would have said that the deceased was in the business of ‘holding investments’.”
The outcome of this case is important for other businesses that fall on the border between trading’ and ‘investment’ – for example, furnished holiday letting businesses where additional services are provided.
The case also serves as a useful reminder that Business Relief is available, and can help you to significantly reduce the value of an estate on death.
If you’re worried about a potential IHT bill and want to understand the steps you could take to reduce it, including whether Business Tax Relief could be used in your case, please get in touch.
Please note: Tax and estate planning is not regulated by the Financial Conduct Authority.