Business Property Relief (BPR) is an Inheritance Tax (IHT) exemption applied to the assets of a private trading business when they pass from one generation to the next.
Most shares in private trading companies, or interests in unincorporated businesses such as a sole proprietor, or partner, will receive 100% business relief from IHT after 2 years of ownership. This is dependent on the owner surviving for the full two years. Other assets can be subject to 50% business relief.
The company or partnership must be actively trading to qualify for the IHT exemption. If a business builds up cash reserves higher than half its value, then the exemption is lost as the business will be classed as an investment business and not a trading business. Likewise, if shares are sold and converted to cash, the exemption will no longer apply, and the value of the shares will increase the size of the estate for IHT purposes.
The main attraction of using BPR in IHT planning is time. It takes seven years for assets that are given away or placed in trust to be fully exempt from IHT. By contrast, a BPR-qualifying investment is exempt after just two years, provided the shares are held at the time of death.
BPR has been an established part of inheritance tax legislation since 1976. And as an investment incentive, it’s relatively straightforward. However, you should keep in mind that the value of an investment may go down as well as up and you may not get back what you originally put in. Tax rules may change in the future, and the value of tax relief depends on your own personal circumstances.
Business Relief Portfolios
Several Investment management firms use the exemption provided by business relief on the shares of private trading companies to build bespoke IHT exempt investment portfolios.
There are currently a number of investment products offered on the market, which qualify for BPR. Investors can buy into a portfolio of private company shares that fulfil the BPR exemption criteria. These investments will be made into small non-listed companies usually trading in asset-backed businesses such as bridging finance, solar panel farms, wind farms, property development, car parks, or storage units. A portfolio of BPR-qualifying companies is usually spread over many sectors and different companies. Asset-backed company investment can give investors some added comfort in the underlying security of the company. Once owned for two years the shares qualify for BPR and are exempt from IHT.
Alternative Investment Market
The Alternative Investment Market (AIM) is a stock exchange listing for smaller companies that have often just obtained their first stock market listing. Shares that are listed and traded on the Alternative Investment Market (AIM) have the added attraction of being exempt from Inheritance Tax after 2 years of ownership under BPR rules. Not all shares listed on AIM qualify for IHT exemption through Business Relief. If a stock is registered on more than one stock exchange or invested in land, property or financial assets such as an Investment Trust or Real Estate Investment Trust (REIT), the exemption does not apply.
Enterprise Investment Schemes
There are incentives for private investors who are considering supporting a business with start-up capital. New businesses that qualify for Enterprise Investment Scheme (EIS) benefit from several tax reliefs. The nature of the investment is speculative due to the stage in the life of the company. Investors that subscribe to shares in an EIS qualifying business can recover income tax on up to 30% of the cost of the shares. The income tax relief is offset against the investor’s income tax in the year of subscription. There is no capital gains tax charged on any gains made on the disposal of shares. Both the income tax relief and capital gains tax relief are conditional on the shares being retained for a minimum of three years. Shares in EIS companies also qualify for Inheritance Tax exemption after 2 years of ownership. These are by far the riskiest investments to attract BPR.
What are the risks?
Much like all investments, there are risks attached to BPR investments. Whilst the current tax rules provide the above-mentioned benefits, there is no guarantee that this will continue to be the case in the future.
It is important to also remember that the shares are not held at the time of death, the tax exemption will be lost. Also, companies may change their BPR qualification status over time which could, in turn, affect an investor’s entitlement for relief.
On top of that, investing in the companies typically listed on AIM or unlisted companies are inherently riskier as these companies may not perform as hoped, and in some circumstances may fail completely. Unlisted companies are also less transparent and less easy to value. As a result, in the worst-case scenario, someone could lose all the money they invest.
