As we are all aware, the only certainties in life are death and taxes but there are ways to save on the latter when the former occurs, through business property relief (BPR), although care must be taken in the planning.
BPR is an inheritance tax relief applicable to particular types of business assets, which is available to both business owners who want to pass on their business to the next generation and to those investing in shares of qualifying companies. However, not all businesses qualify for the 100 percent relief and the devil is in the detail.
For example, if the company has become incorporated to reduce income tax liabilities, then BPR would not apply, unless the owner holds the controlling interest in the company.
While for a business to qualify, it must be managed for profit, although there are exceptions to this. Businesses that deal mainly in securities, stocks or shares, land and buildings, or making or holding investments will not qualify either, although a property development company would.
Also, the asset has to be held at the time of death and for at least two years previously, although it is possible to replace assets with a different qualifying asset and roll over accrued inheritance tax relief.
For example, a person might hold shares in one eligible company for one year, then sell them and buy into a different company. As long as they have held eligible shares for two out of the previous five years, and hold them at death, those shares will be eligible.
If you sell a business this often creates an Inheritance Tax (IHT) problem. For example £1 million of business assets could be free from Inheritance Tax. £1 million in the bank would create a liability to IHT of £400,000.
If you sell your business you can solve this problem by reinvesting these funds into investments which qualify for BPR. This can save Income Tax, CGT and IHT all though one investment.
For more advice on tax relief and financial planning, our team at Milsted Langdon Financial Services Limited will be able to guide you in your investment decisions to help you reduce your tax bills and balance the risks you take with the returns you can expect.
Steve Horton is a Chartered Accountant and a Chartered Financial Planner who specialises in helping clients to manage their pensions and investments