Key takeaways
Investment companies face IHT exposure
Non-trading businesses generally do not qualify for BPR.
Group structures can unlock relief
Corporate restructuring may secure valuable inheritance tax savings.
Succession planning supports tax efficiency
Structures must reflect genuine commercial and family objectives.
Inheritance Tax (IHT) relief for trading businesses, known as Business Property Relief (BPR) is a very generous relief which can often reduce the IHT payable on the death of the owner. Where the relevant conditions are met, qualifying business property can benefit from relief of up to £2.5 million, with any excess value taxed at a reduced rate.
One of the key criteria is that the business must be trading, so any business which ‘wholly or mainly’ holds investments will not qualify for BPR.
HMRC view businesses which let commercial or residential property, deal in property or own serviced offices as non-trading businesses. As such, the value of the assets of these businesses will generally be subject to IHT at the current rate of 40% on the death of the owner.
Structuring opportunities
If the investment business operates as a company, there are opportunities for the client to create a corporate group structure so that the overall activities of the group enable the shares in the holding company to qualify for BPR.
For example, a property investment company (company A) could be restructured to have a holding company (Parent Co) and another subsidiary (company B). On the basis that company B is a trading business, and they amount to a larger value, than that of company A, within the corporate group, the value of the shares in Parent Co should qualify for BPR and ensure the value of the businesses pass free of IHT on the death of the owner.
If the activities of the property investment company are a mix of letting properties and property development then this mixed-use business may qualify for BPR, however, it will very much depend on several factors specific to the activities of the company. If the company’s activities are deemed to be mainly holding investments rather than trading, then the whole value of the company will be subject to IHT.
Common pitfalls
The restructuring cannot just be a paper-based exercise, the group must have more value attributed to its trading business.
Having a wider succession plan is also important to show that the structuring has been done to meet a commercial purpose. Whilst this could include issuing shares in the Parent Co to the client’s children or other family members, Trusts can also be utilised to provide wider protection and flexibility if there are concerns about divorce or financial mismanagement by those being introduced to the corporate group.
This wider succession planning can also allow the next generation to be introduced to the management of the corporate group or provide an opportunity for the founding generation to step away as part of a retirement strategy, particularly if preference shares to preserve income were to be included as part of a restructuring.
Generally, the rules relating to BPR are not straightforward and there are a plethora of cases and several factors which need to be taken into consideration. However, with the correct advice and appropriate structuring, the saving of IHT for the client can be considerable and ensure the smooth transition of wealth to the next generation.
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