Business property relief (BPR) is a valuable inheritance tax (IHT) relief. The rates of BPR are 100% or 50%, depending on the type of relevant business property. For example, BPR at 100% can potentially shelter the value of an individual’s business from IHT on the owner’s death, if certain conditions are satisfied.
For BPR purposes, the value of a business (or business interest) is its net value. The ‘net value’ of a business is the value of assets used in the business (including goodwill, which may not necessarily be shown in the business accounts) less the total amount of any liabilities incurred for business purposes (IHTA 1984, s 110).
Business assets
Whether assets and liabilities form part of the ‘net value’ of a business for BPR purposes can make an important difference to the IHT liability in respect of an individual’s estate on death.
For example, if an asset is excluded from the net value of the business, this may result in an IHT liability on that asset. When establishing whether an asset should be included in the net value of the business for BPR purposes, it is necessary to consider whether the asset was used in the business when its owner died (or when the business was transferred).
If investigating a BPR claim, HM Revenue and Customs (HMRC) may examine the business accounts and other information to establish whether the assets were actually used for the business at the relevant time, with a view to denying BPR on any assets which were not (see HMRC’s Inheritance Tax manual at IHTM25342).
Excepted assets
The BPR provisions on the net value of a business should not be confused with the ‘excepted assets’ test (in IHTA 1984, s 112), which broadly applies to assets used in the business and makes them ‘excepted’ (i.e. it excludes them from BPR) if they were neither used wholly or mainly for the purposes of the business throughout the whole or the last two years of the relevant period, nor required for future use for those purposes.
In practice, HMRC apply a two-stage process: (1) establish the assets used in the business at the date of transfer (as part of the process of establishing the net value under IHTA 1984, s 110); and (2) apply the excepted assets test to the assets so used (IHTM25341).
Business liabilities
If a liability is deductible from business assets (on which BPR is available at (say) 100%), the amount of BPR is correspondingly reduced. On the other hand, the income tax liability of a business partner in respect of his share of partnership profits is an example given by HMRC of a liability not incurred for the purposes of the business, so is not deductible in calculating the net value of his partnership interest for BPR purposes (see IHTM25250).
In Williams and Ors v Revenue and Customs [2018] UKFTT 136 (TC), prior to his death in February 2011 an individual (DSC) was the proprietor of a fine art business, which operated from premises in London. He occupied the premises under a lease for a 10-year term, which started on 25 December 2005. The annual rent was £22,750, payable quarterly in advance. DSC paid the rent on the lease from his business bank account, recorded it as a business expense in his accounts, and deducted it from his business profits.
Following his death, DSC’s executors submitted an IHT return to HMRC, which included a claim for BPR relating to DSC’s trading stock, but excluded his liability under the lease. A claim was made as a deduction against DSC’s general estate for the rental payment under the remaining term of the lease of £113,750.
HMRC sought to increase the IHT due on DSC’s estate by deducting from the part of his estate which qualified for BPR the £113,750 representing the rental outstanding on the lease of DSC’s business premises, on the basis that the liability should be taken into account in the net value of his business. The main dispute was therefore whether the rental payment of £113,750 should be deducted from the part of DSC’s estate which qualified for BPR.
The First-tier Tribunal concluded that the rental payment was a liability of DSC’s business, which should be treated as falling within IHTA 1984, s 110(b). The tribunal’s view was supported by the fact that the rental was paid from DSC’s business account, and lease payments were recorded in his business accounts as business deductions.
Practical point
When quantifying the amount of BPR in respect of a business, look at each asset and liability carefully and consider whether they formed part of the net value of the business at the date of the business owner’s death (or the business transfer).
The above article was first published in Business Tax Insider (September 2018) (www.taxinsider.co.uk).
