BR Guide FINAL 20 Feb

10 THE IHT LANDSCAPE 11 THE IHT LANDSCAPE Key BR Rules 1.2 The relief cannot be guaranteed upfront. As with many other taxes, HMRC only makes an assessment when a claim is made: either by the executors of the deceased’s estate or when there has been a lifetime transfer*. So, even if a business is likely to qualify for BR at the point of investment by a client, if that business subsequently changes its activities to non-qualifying activities or secures a listing on a recognised stock exchange, it may no longer qualify. BR Qualifying Conditions for 100% IHT Relief Unquoted shares in qualifying ‘trading’ companies (a business run on a commercial basis with a view to profit), subject to the relevant conditions, qualify for 100% relief from IHT with the benefit of BR and shareholders need not be a director, work full time in the company or hold a minimum number of shares. The shares can also be preference or non-voting shares. The shares must be held for at least two years prior to death. — But qualifying investments may also be treated as satisfying the two-year minimum ownership period where they replace (either directly or indirectly) other relevant assets that potentially qualify for BR. The replacement asset needs to qualify as relevant business property and must be bought within three years of the disposal of the original relevant asset. BR applies, provided the ownership periods of qualifying assets total at least two years in a continuous five-year period. —And, if the property was inherited, it is deemed to have been owned from the date of death, unless it was inherited on the death of a spouse or civil partner. In this case, the surviving spouse or civil partner will be treated as having held the relevant asset from the original date of investment, rather than the date of death. 1 3 For the purposes of BR, HMRC defines unquoted shares as those which are not listed on a recognised exchange. However, the Alternative Investment Market (AIM) and the ICAP Securities and Derivatives Exchange (ISDX), formerly known as PLUS, are not classed as recognised stock exchanges and suitable shares listed on these markets are eligible shares for BR. (Consequently, reference to unquoted or unlisted shares throughout this guide includes AIM and ISDX listed shares.) Since 2013, AIM shares have been eligible for inclusion within an ISA, and by investing in eligible shares it is possible to have an IHT exempt ISA. 4 If a company has an eligible activity as its main activity (more than 50% of turnover) but is also involved in a non-qualifying activity as a minor part of its business (less than 50% of turnover), the entire shareholding should still qualify for BR. 5 Investors must not use debt to purchase BR qualifying investments: the liability will be added back into the investor’s estate. 6 Since BR involves investment where the investment asset continues to be held in the name of the investor rather than disposing of the asset by gifting ownership to another party, it can provide a simple solution when an LPA is in place. 7 Any assets within a business that are not deemed to be used for the purposes of carrying on the trade of the business will not qualify for BR. The effect is a proportionate reduction in relief. This can include large cash reserves. 8 If the business is subject to a binding contract for sale, then it will not qualify for BR. However, there is an exception to this rule where there is a properly drafted cross-option arrangement in place that enables a business to pass into the hands of surviving shareholders, which should be standard practice in many small businesses. 2 The company’s main activity must not be non- qualifying. So, if the company deals in shares, makes or holds investments, or deals in land or buildings (although property development companies are eligible, whilst property lettings businesses are not), then it will not qualify for BR. For the most part, BR enabled testators to achieve their most important objectives of keeping assets in the family and avoiding breaking them up, as well as providing a tax-effective way of passing on their assets to beneficiaries. HER MAJESTY’S REVENUE & CUSTOMS % Available BR Relief: * Lifetime transfers of value (e.g. gifts) that are immediately chargeable to IHT. In general, a lifetime gift is immediately chargeable (chargeable lifetime transfer (CLT)) unless it is an exempt transfer or a potentially exempt transfer (PET). � A business or an interest in a business � Shares in an unlisted company 100 % RELIEF AVAILABLE 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 were a partner in or controlled � Land, buildings or machinery used in the business and held in a trust that the deceased has the right to benefit from 50 % RELIEF AVAILABLE ON The relevant conditions that must be met are: