When planning for your family's future, you are well advised to consider any assets you have which may qualify for Business Property Relief as a key part of your plans. This is because Business Property Relief is a very valuable relief; it can reduce the value of any gifts you make during your lifetime or after death by 50% or even 100%, when calculating the Inheritance Tax (IHT) due on that asset.
What is a qualifying asset for Business Property Relief?
Assets which qualify for Business Property Relief include businesses, or interests in businesses. 100% relief can be claimed against the value of a business you run as a sole trader, your share in a partnership business, and on shares and securities held in unlisted companies. 50% relief can be used to reduce the value of shares you hold in listed companies, and of certain assets you own, but which are used within a business.
Are there any exceptions?
Not every business interest will qualify for this attractive relief. Broadly, you must have held the asset for 2 years before you pass it on. And businesses do not qualify for the relief if they are "wholly or mainly" dealing in shares or land, or making or holding investments.
I let out a property... will I be able to claim Business Property Relief if I pass on this business?
There is no legal definition to help us decide whether a business is making or holding investments. Unsurprisingly, this means that many claims to Business Property Relief have ended up in the courts. All businesses are different; the courts will take an overview of the activities of a business and consider the specific facts.
Generally, letting out property will be considered making and holding investments rather than trading, so will not qualify.
My property is a furnished holiday let. Does that make a difference?
Initially, HMRC may dispute this is even a "business". Even if you are successful in arguing it is, HMRC guidance is clear: as a general rule, furnished holiday lettings will not qualify for Business Property Relief. But HMRC do acknowledge that if the business involves a high level of additional services, the activity may be considered non-investment.
Historically, such claims reaching the courts have been unsuccessful, although recent signs are that the courts may be open to applying the rules more liberally. In the case of Graham, the court referred to the nature of the holiday accommodation business as "exceptional", but they did finally accept that it just about fell on the side of mainly non-investment so qualified for Business Property Relief. The business appeared more like a family-run hotel than a second home let out for part of the year. Significant factors were the substantial amount of time the owner and others spent working in the business, and the extra benefits offered to guests such as welcome packs and toiletries.
More recently still, the courts considered Business Property Relief should be granted in the case of Marks, also commenting that this was a business of an "exceptional" nature. This business was letting out a flat specifically tailored to the needs of Orthodox Jewish guests, for example with Kosher compliant food preparation and storage arrangements. The court ruled out the specific religious nature of the property as the key factor in determining whether or not the business was the holding of an investment. So what pushed it towards trading? It appears that the business, when regarded as a whole, was viewed instead as mainly providing a service.
I'm undecided, can I claim Business Property Relief or not?
It's a thorny area: at 100% relief, the stakes are high. HMRC and the court will consider each case on its own facts. The specialist tax team at DMH Stallard can help you to tease out those facts and apply the legislation, guidance and case law, in order to reach a conclusion. The team will also help you to consider whether you are able to make use of other reliefs to mitigate your Inheritance Tax bill, and also whether there are plans you could put in place now to reduce your overall tax exposure. Any movements of assets may trigger charges to, to name but a few, Stamp Duty Law Tax, Capital Gains Tax and Income Tax.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.