Business property relief (BPR) potentially provides inheritance tax relief at 100% (or 50%) on various types of ‘relevant business property’, including a business or interest in a business, or shares in an unquoted company. The relief may be available on death and also on lifetime transfers which would otherwise trigger an IHT liability, such as a gift of business assets into trust.
However, business owners and shareholders need to be aware of various conditions which must apply in order for the relief to be available. Some of these are well known, for example, BPR does not generally apply if the business consists wholly or mainly of making or holding investments. However, there are other traps which must be avoided, including the “binding contract” pitfall.
BPR will generally be denied if there was a binding contract for sale of the business property in place at the time of the owner’s death or at the time of a lifetime transfer. This is an anti-avoidance rule; the underlying principle is that BPR should be available in respect of ‘relevant business property’, but not cash. A binding contact for sale has, effectively, turned the business property into a cash asset even if the sale has not completed.
To give a straightforward example, if contracts have been exchanged for the sale of a business asset and the owner dies before the sale completes, BPR would be denied. However, a less obvious trap could catch out a business owner who has inadvertently created a binding contact for sale due to a ‘buy and sell’ agreement. These are broadly arrangements whereby, in the event of the death of one of the owners, his Executors are obliged to sell, and the survivors are obliged to buy, his partnership interest or shares in a company. The purchase price will often be provided through a life assurance policy.
Fortunately, arrangements can often be structured in such a way that BPR remains available. For example, agreements may include:
- accruer clauses under which the deceased’s interest passes to the surviving business owners (rather than his Executors), who are required to pay a particular price (commonly an arm’s length valuation of the business interest); and
- options under which the deceased’s business interest falls into his estate, but with an option for the survivors to purchase it.
HMRC accepts that the above types of arrangement do not constitute binding contracts for sale and therefore do not prevent the business interest qualifying for BPR.
If a company’s Articles of Association require the deceased shareholder’s personal representatives to offer the individual’s shares for sale to the company, or other shareholders or directors, the BPR disqualification does not apply, provided there is no obligation on the survivors to buy the shares. However, care is needed to ensure there is no mutual obligation to do so.
Lifetime gifts made just prior to business sales
Aside from business property held on death, lifetime gifts of business property (for example, shares in a family trading company) are sometimes made in anticipation of a business sale. HMRC is likely to investigate cases where chargeable lifetime transfers of business property into trust are made shortly before business sales, to establish whether BPR is properly due.
For example, if a chargeable lifetime transfer of shares into trust (on which BPR is claimed) is followed within six months by a sale of the company (or a sale of the gifted shares), the BPR position will be “carefully checked” by HMRC to see if there was a binding contract for sale at the date of transfer. The same applies if the sale occurred more than six months later, but the circumstances suggest that the sale may have been in prospect at the time of the lifetime transfer. If there was a binding contract, BPR will generally be denied.
Business owners should review the terms of any agreements or arrangements dealing with the sale of their business interests on death, with a view to ensuring that they are structured in a ‘BPR friendly’ way.
In addition, care is needed where a chargeable lifetime gift of business interests into trust is being considered, as BPR may not be available if the business is sold shortly afterwards.