The value of your business assets is protected from inheritance tax (IHT) by business property relief (BPR). But as soon as you contract to sell the business, BPR is lost. What steps can you take to preserve it?
BPR basics
The reason for business property relief (BPR) is not HMRC’s generosity, it’s mainly to stop businesses from having to be broken up to pay inheritance tax (IHT) bills when the owner dies. There are two rates of BPR – 50% and 100% – but we’re going to look at the latter. It can apply to the value of shares you own in a trading company, a share of a trading partnership or a business you own and run yourself. Naturally, conditions apply.
Qualifying period condition
Where 100% BPR applies it means that no IHT is payable on the value of your business assets in your estate when you die, yet this only kicks in after you have owned the assets for two years.
End of BPR
BPR ceases to apply as soon as you contract to sell your business assets. This means that the money you receive could be liable to IHT at 40%. However, the good news is that BPR can be reinstated without having to wait the usual two years.
Replacement BPR
You have up to three years in which to find a suitable business in which to invest your money. As soon as you contract to buy into the business BPR applies, i.e. there’s no two-year wait.
If you haven’t owned business assets for the required two years to qualify for BPR before you sell them, you can still make the short ownership period count by using the replacement rule.
Example. John starts a business which is a success from the off. After just 18 months of trading he is made an offer too good to miss. BPR didn’t apply to the business, but if he invests the proceeds in a qualifying business within the following three years, it will qualify for BPR after just six months. This is because the rules aggregate the 18 months’ ownership of her original business with that of the replacement asset.
Stop-gap investment
After selling your business, even three years might not be enough time to find the right replacement to invest in. In order not to lose the right to immediate BPR for the replacement assets, you can bridge the gap by investing in one of the many BPR-qualifying portfolios offered by investment companies. You can sell it once you find a more permanent home for your money.
If, within three years of selling your business, you invest in another that meets the conditions for BPR, it will qualify immediately rather than after the usual two years. To avoid your estate being exposed to IHT while you find the right business, consider taking term life assurance to cover the possible IHT bill.