Buy and Sell Agreement: Business Security or Tax Nightmare?

How a common buy and sell agreement could undermine your Inheritance Tax Strategy.

buy and sell agreement
Buy and Sell Agreement

(3 minute read)

This week’s top tip is all about:

  • Using Business Property Relief (BPR) for Inheritance Tax (IHT) planning
  • What a buy and sell agreement is
  • How these agreements undermine IHT plans

Business Property Relief and Inheritance Tax Planning

BPR is a vital part of many business owner’s succession planning. It’s a fantastic tax feature that can grant a generous reduction in your beneficiaries IHT obligations when you die.

Depending on your business structure, you could get relief on 50% or 100% of IHT on your property!

The way it works is simple. You can make a claim if you have a business interest in your property and have been part of the business for at least two years.

With smart planning and professional advice, BPR can be a phenomenal asset. Read our other article here for more advice on using BPR for IHT planning.

But even if you plan to use BPR, your IHT plan could have one fatal flaw.

What is a Buy and Sell Agreement?

A buy and sell agreement is a common clause in business partnerships and companies owned by more than one person.

In principle, it’s simple. If one partner/shareholder dies before retiring, their beneficiaries must sell the inherited interest in the property to remaining partners/shareholders.

The remaining partners/shareholders must buy said interest in the property.

These clauses very common because they are extremely useful. They provide a great deal of security both for your beneficiaries and business partners/fellow shareholders.

Your beneficiaries can relax knowing they’ll be able to sell their ownership of a property they have no interest in. They won’t be saddled with unneeded stress because a buyer is guaranteed.

A buy and sell agreement also gives beneficiaries peace of mind. Knowing they’ll profit from the property without being saddled with business responsibility.

Despite the benefits, this arrangement could be the Achilles’ heel in otherwise air tight IHT plans.

How Buy and Sell Agreements can Undo Your IHT Plan

HMRC sees buy and sell agreements as binding contracts.

Because of this, the existence of a buy and sell agreement is one of the most common reasons for HMRC to deny BPR. HMRC see that there is a binding contract for sale, made before death, and deny BPR on this basis.

This is particularly upsetting because the issue is generally not discovered until after death. This means there’s no way for your beneficiaries to resolve the problem.

This simple agreement that is part of many partnerships and companies could unknowingly undermine your IHT plans, leaving less for your family and more for the tax man.

What to do Now?

Review your business documents before you decide to rely on BPR in your IHT plan. Check everything carefully or have a professional do it.

If there is a buy and sell agreement, you need to find alternative methods of IHT planning.

The Tax Expert team have years of experience in dealing with even the trickiest circumstances, helping our clients achieve the best possible results.

Call now at 01772 788200 to book a consultation or e-mail us by filling out the form below.

Kind regards Ilyas