BPR on gifting shares in the family trading company
A common scenario we get asked for assistance with is the passing on of the family trading company to the next generation by way of a gift of shares.
In our August ‘A Matter of Tax’ newsletter, we are covering potential inheritance tax and capital gains tax (‘CGT’) pitfalls to be aware of, and this article focusses on the inheritance tax (‘IHT’) perspective and whether business property relief (‘BPR’) will apply.
BPR is a relief that reduces the taxable value of property on which inheritance tax is charged. The reduction will generally be available where a transfer of business property is made, or where a deceased estate contains business property.
An asset qualifies as business property if it meets two conditions:
- The transferor must have owned the asset for at least two years continuously before they transfer it or before they die; and
- The asset must fall into one of the qualifying classes.
Included within the qualifying classes which can qualify for 100% BPR are shares in an unquoted trading company (or group).
For this purpose a ‘trading company’ (or trading group) is effectively defined as one whose activities consist “wholly or mainly” of trading activities. This is accepted to constitute a greater than 50% test, however it can be considered by reference to assets, income, profits and management time, with all of these factors being looked at ‘in the round’ to determine if the company (or group) is wholly or mainly undertaking trading activities.
Assuming that a company (or group) has had its activities reviewed and is considered to satisfy this requirement then BPR should apply. However, there are a number of other pitfalls to watch out for such as:
- Where assets related to the company’s trade such as land or building are held outside of the company then 100% BPR will not apply. BPR at the reduced rate of 50% can apply but this requires, immediately before the transfer or the transferor’s death, that it was used for business purposes by a company controlled by the transferor.
- Passively held investments owned in the company (or group) are ‘excepted assets’ such that their value is not covered by BPR, even where 100% BPR is otherwise available. Passive investments typically include assets such as:
– investment property which is not let out (e.g. lived in by a relative);
– excessive cash reserves held for investment purposes (e.g. in a fixed rate bond); and
– loans made on non-commercial terms to a connected party outside of the corporate group.
- Subsidiaries within the corporate group whose activities do not, when considered in isolation, meet the ‘wholly or mainly’ trading requirement, are also considered excepted assets and excluded from a BPR claim.
- Whether the trading activities undertaken are within any of the excluded trade headings which are specific to BPR. This list includes trading in land or buildings which for CGT purposes is considered to be a trade but is excluded from qualifying for BPR.
- Whether binding contracts for sale are in existence which can prevent BPR from applying. For example, if there is a shareholder’s agreement which obligates the buying back of a deceased’s shareholding on death then the asset in the death estate is considered to constitute cash for IHT purposes (i.e. taxable), rather than shares in the company which would potentially qualify for 100% BPR.
- Where lifetime transfers are subject to the IHT on death (where the donor dies within 7 years of making the gift), BPR may be withdrawn (or no longer be available) on lifetime transfers that originally qualified for the relief. In broad terms this will be the case where the donee no longer owns the business property that was given to them, or the property owned by the donee no longer qualifies for the relief.
Whilst there are numerous pitfalls noted above there are also in many cases ways that planning can be used to improve the BPR position.
If you would like further information please contact us.
This is intended as a summary and overview of the tax situation and does not constitute financial advice and no action should be taken without first seeking professional advice specific to your circumstances.