Investment companies can get BPR (Business Property Relief) with proper planning. Read our article to find out more.
We will cover:
- What companies qualify for Inheritance Tax (IHT) relief
- How to plan ahead to qualify for BPR (Business Property Relief)
A business switch that could save you thousands
When a shareholder dies, shares in investment companies are generally subject to Inheritance Tax (IHT). Trading companies can claim relief from this tax, as they are entitled to claim Business Property Relief (BPR).
However, it’s possible to get relief from Inheritance Tax in the future by planning ahead. Read on to find out how to get Business Relief of either 50% or 100% on your investment company.
Business property relief Investments vs Trading
Firstly, what you need to consider is how much you use your company for trading purposes. If a company holds too many investments, this may make the company totally ineligible for the relief.
Therefore, the company’s business must be mainly in trading. Specifically, 50%, according to HMRC’s ‘wholly or mainly’ rule. If it qualifies, you could get partial or full IHT relief.
Most businesses and partnerships can qualify for BPR if they pass the 50% trading test. According to HMRC, this means that a business’s activity has to be less than 50% of investment activities, which include:
- Purchasing stocks and shares
- Buying land and/or buildings
- Holding investments
What this means in practice is that a company only loses its trading status for Inheritance Tax purposes if its non-trading investments and related activities exceed 50%.
Investments that qualify for BPR can be passed on free from inheritance tax upon the death of the investor, provided the shares have been owned for at least two years at that time.
A company’s shares can still qualify for business property relief with up to 50% of its activities being investments, you might initially think that you could simply put a whole load of investments in the company and still qualify for the full inheritance tax exemption.
Sadly, that is not the case. Where a company holds investment assets that are not part of its main business activities, the shares in the company will only attract partial relief.
Business Property Relief investments: Example
If you own shares in qualifying companies for at least two years before you pass away, and still hold them at time of death, your loved ones can benefit from them free from Inheritance Tax. See our example below for an example of how this can happen.
Robert owns a company which rents office space. He is approached by a developer who feels that one office block (which represents 70% of the portfolio) could be developed into residential apartments subject to planning. Robert agrees a deal whereby the developer will seek planning permission and oversee construction, in return for 30% of any profit (payable as a fee).
From a tax perspective the office will be appropriated into trading stock at the point where the company crystallises its trading intention. This would result in a capital gain arising, based on the property’s market value. The company could elect to defer this gain into the cost of the stock, meaning they would only have to pay tax when making a trading profit. If Robert were to survive two years from the date of this appropriation, then 100% BPR should be available on death.
Furthermore, even if Robert survives less than two years, his family could still benefit from Inheritance Tax relief. This is because the two-year ownership rule applies to the holding of the shares, and not to the length of time trading. It is unclear whether HMRC agree with this latter view.
In conclusion, if a company is predominantly (more than 50%) a trading company, then BPR will still apply to any subsidiary investment activity which also carries out.
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