Business owners need to make sure their company does not fall foul of Business Property Relief (BPR) rules.
Business Property Relief (BPR) is a valuable relief as shares in companies benefiting from it are not subject to Inheritance Tax. Where companies hold substantial amounts of cash, there is a risk of losing this relief. This is because HMRC might class them as an investment business rather than a trading one.
The effect of surplus cash can be extreme as a company either does or does not qualify for the relief. There is no middle ground.
Losing the relief could mean whoever the business passes to might have to sell it to pay the IHT bill. This could be the opposite of what was originally intended.
What options are available?
A simple option for business owners is to take the cash out of the business. Pension contributions are a great way of doing this. However, pensions are complex and there are limits to how much a business can pay into them. Another option is to take the money out as dividends but there are many tax implications to this strategy. One of these is that any unspent money would still be subject to inheritance tax.
Taking cash from a business also could be impractical if there might be a business use for it in the future.
What if I did not want to take the money out of my business?
Another option would be to keep the cash within the business and invest it in companies that undertake further trading activities. This could happen in partnership with other like-minded companies and overseen by a professional manager. Becoming a member of a partnership that carries out qualifying trades would put the capital at risk, but could potentially restore BPR.
A further benefit is that putting cash to work in qualifying business activities offers the potential to generate additional profits for the business.
