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The rules around BPR qualification are
actually relatively simple:
You can get 100% relief on:
A business or interest in a business
Shares in an unquoted company
(which includes companies listed on AIM
and ISDX, which are considered to be
unquoted for the purpose of BPR).
You can get 50% relief on:
Shares controlling more than 50% of
the voting rights in a listed company
Land, buildings or machinery owned
by the deceased and used in a business
they controlled or were a partner in
Land, buildings or machinery used in
the business and held in a trust that it
has the right to benefit from.
You can’t get any relief if the company:
Mainly deals with securities, stocks
or shares, land or buildings, or in
making or holding investments
Is a not-for-profit organisation
Is being sold, unless the sale is to a
company that will carry on the business
and the estate will be paid mainly in
shares of that company
Is being wound up, unless this is part
of a process to allow the business of the
company to carry on.
You can’t claim business relief on an
asset if it:
Also qualifies for agricultural relief
Wasn’t used mainly for business in the
2 years before it was either passed on as
a gift or as part of the will
Isn’t needed for future use in the
business.
BPR products focus on the first category
of relief - 100% relief on shares or an
interest in an unquoted business.
These rules mean that there is
quite a broad BPR investment
universe. However, there are two big
considerations for investors: avoiding
potential pitfalls and picking winners.
POTENTIAL PITFALLS
Although the qualification rules are
simple, it’s still worth looking at some of
the potential pitfalls that would exclude
an investment from BPR qualification.
“You can’t get any relief if
the company mainly deals
with securities, stocks or
shares, land or buildings
or in making or holding
investments”
Pitfall:
this excludes residential
and commercial property lettings,
property dealing and most serviced
offices. It is also likely to exclude
property management, some property
development businesses and holiday
letting businesses. In short, when
looking for BPR qualifying investments,
it is wise to be wary of business models
based around property rentals. Note
that property development, and lending
to developers, are much less sensitive
issues.
Pitfall:
“mainly” is generally taken to
mean more than 50% of a firm’s activity.
In deciding if companies are captured
by this definition or not, HMRC will
look at the business as a whole and
examine all the main activities, assets
and sources of income. The relief is “all
or nothing”, i.e. you cannot get relief on
just the proportion of the business that
is undertaking a qualifying trade.
So if a client invests with a property
developer with the intention of
accessing BPR, but over time the
developer begins to undertake letting
and management activities to the
extent that when the application for
BPR is assessed, letting comprises more
than 50% of the business, there will be
no relief on any of the investment.
“You can’t get any relief
if the company is being
sold, unless the sale is to a
company that will carry on
the business and the estate
will be paid mainly in
shares of that company”
Pitfall:
there is no BPR if there is
a binding arrangement to sell the
business. Basically, HMRC only wants
to give relief on businesses that will
continue after the shareholder’s death.
However, the common arrangement
that the deceased shareholder’s
shares be purchased by the remaining
shareholders is fine, provided this was a
cross option arrangement which applied
to all shareholders.
“You can’t claim business
relief on an asset if it isn’t
needed for future use in the
business”
Pitfall:
this is an anti-avoidance
measure, preventing business owners
from classifying personal assets - such
as a holiday home or yacht - as business
assets and thus removing them from
the estate and avoiding IHT. The relief is
only for assets used in the business.
Pitfall:
this anti-avoidance measure
can extend to cash balances within
the business, which is a grey area that
could trip up perfectly honest and
well-intentioned business people: how
much cash can reasonably be said to be
needed for future use in the business?
Holding a buffer against an economic
downturn or a war chest for future
acquisitions could prove costly when it
comes to BPR qualification. Businesses
must be able to show that the cash had
a defined future purpose.
QUALIFYINGASSETS
