BR Guide Second Edition

8 THE IHT LANDSCAPE 9 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. 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 NEX Exchange (NEX) 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 NEX 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 ISA that is outside of the charge to IHT. BR-eligible shares purchased on an unrecognised exchange are generally AIM listed, almost to the exclusion of NEX. 4 Where shares are held, or there is a business or an interest in a business, the main activity must not be non-qualifying. So, 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 Assets (including cash) within the business will be considered “excepted assets” and will not qualify for BR unless they are either: used wholly or mainly by the business concerned throughout the two years preceding the transfer to the beneficiary; or required at the time of the transfer for future use for the purposes of the business. However, unlike the 50% condition for the business’s activities, relief is still granted on the remainder of the business’s assets. Simply holding cash in reserve to guard against a downturn is not considered a specific commercial justification. 6 Investors must not use debt to purchase BR qualifying investments: the liability will be added back into the investor’s estate. 7 A BR investment retains the ownership of the asset in the hands of the investor and it remains within their estate. This may provide advantages when an LPA is in place. 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. Where shares are held, or there is a business or an interest in a business, the 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. The shares (and relevant business property) must be held for at least two years prior to death. —But qualifying business property may also be treated as satisfying the two-year minimum ownership period where it replaces (either directly or indirectly) other qualifying business property. The replacement asset 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 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. HMRC % 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: 85% of UK businesses are family owned SOURCE: DEMENTIA: INSTITUTE FOR FAMILY BUSINESS