Valuable relief can be lost

James Skellorn of Barker Gotelee warns that entitlement to Business Property Relief cannot not be taken for granted

James Skellorn of Barker Gotelee warns that entitlement to Business Property Relief cannot not be taken for granted

ONE of the most important reliefs for Inheritance Tax is Business Property Relief (BPR) which can exempt from tax completely the value of your business.

To get relief it must be a trading business and not an investment business. The difference between the two should be obvious.

Some recent cases have, however, clarified some grey areas. If a business has a strong property bias, HM Revenue & Customs is strongly inclined to label it as an investment business.

Often a business is clearly a trading business when it starts, but slowly changes its nature. For example, a house builder is successful over the years and retains a number of properties, and lets them instead of selling them. The let properties are investments and are not part of the trading stock, and slowly the business is changing from a trading business to one that simply manages investments.

Another common situation is that a farming business has redundant buildings which are no longer suited to modern farming purposes and cottages that used to be occupied by farm workers. The farm buildings are converted for other uses and let, and the cottages are no longer needed for agricultural workers so they are let short hold. The let buildings and cottages are investment assets.

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Another common scenario is that profits are retained in cash in the business account, and over the years the balance of the cash mounts up to the point where there is way more than is needed to fund the ordinary running of the business. HMRC will regard the surplus cash as an investment asset and will not allow relief on it unless it can be shown that there was a plan to use this cash for the purpose of the business in the foreseeable future.

It is important to recognise when this process is happening and take advice on the best way to structure the business to maximise BPR. In general, HMRC will disallow relief on the parts of the business that are investment assets, and not connected with the trading activities of the business.

However, careful structuring of the business can achieve dramatic tax savings, providing timely advice is taken and acted upon.