BR report 2018

18 19 “With IHT receipts expected to rise to £6.5bn by 2023 according to the OBR, estate planning is becoming an important issue for an increasing number of people.” — SAM MCARTHUR, CHIEF OPERATING OFFICER, PUMA INVESTMENTS BR PROVIDING MUCH NEEDED INVESTMENT IN UK ECONOMY BR’s support of UK family businesses brings benefits to the whole UK economy; consumers, the Exchequer, and the millions of people who work for unlisted and AIM listed firms. They can include family-run SMEs which are defined by the Department for Business, Energy and Industrial Strategy (BEIS) as having up to 249 employees and a single owner or is majority owned by members of the same family. Large family businesses, where there are more than 249 employees and a UK family possesses a 25% shareholding, or a first generation entrepreneur self- identifies the company as a family firm, can also benefit. Between them, these firms turn over £1.3tn in the UK each year. 19 Some 85,000 family SMEs are expected to transfer ownership of their business to a new generation each year. 20 Around 64% of family SMEs are estimated to be first generation businesses. 21 BR supports these firms in continuing to invest and grow under stable ownership, and successfully transition to the next generation. BR providers invest in a variety of qualifying companies including non family businesses, AIM listed companies or unlisted companies with very fractured shareholdings and many of these solutions will have a very positive effect on the UK economy. For example, where BR providers are involved in lending to residential property developers, as well as providing bridging loans and mezzanine finance,or investing in construction companies, the potential for a positive impact on the housing crisis are clear. COMPLIANCE CONSIDERATIONS NUANCES IN THE MARKET GILLIAN ROCHE-SAUNDERS PARTNER, BATES WELLS BRAITHWAITE WHEN IS USE OF LAND BR QUALIFYING? It’s a well-established principle that in order for its shareholders to benefit from Business Relief (BR) from Inheritance Tax, a company can’t simply exist to hold or make investments, including land and buildings, there needs to be some real trading activity. The question of what constitutes ‘trading’ is the question that’s been on everyone’s lips and caused businesses to challenge the Tax Tribunals to provide some clarity. However, the Tribunals have set somewhat contradictory precedents in two similar cases where land is rented and services provided. The question that arises from both cases is, where is the line drawn between a trading business and simply utilising the land on which it is on? ROSS V HMRC, 2017 The first case (Ross v HMRC) concerned whether self- catering cottages, rented out to holidaymakers, qualified for BR. HMRC had generally held that furnished holiday lettings would not qualify for BR as they were primarily an investment in land, not a trading business. However, in this case the cottage renters were allowed to access the facilities of a nearby hotel, also owned by the owner of the cottages. Services included the ordering of food and drinks and access to a mid-week clean. Ross argued that these additional services were sufficient to show that the cottages were a trading business. While the Tribunal acknowledged that the properties offered more than the usual level for a furnished holiday let, it was not sufficient for trading to be considered the primary purpose for the land and so it was not eligible for BR as a trading business. VIGNE V HMRC, 2017 While the Ross decision may appear to be relatively clear in showing that land with services does not constitute a trading business, further confusion came with the decision in Vigne v HMRC (2017) where the residents on a piece of land were horses rather than people. Vigne owned a piece of land, on whic, a livery stable business was based. In deciding whether or not Vigne was operating a trading business, the components of the livery offering were considered as a whole. As Vigne offered additional services to a standard stables, such as medical checks and treatment, bedding and cleaning of areas where the horses were living, the Tribunal concluded that the use of the land was a viable trading business and not solely an investment in land. A basic livery business is likely to have not been eligible for BR as the Tribunal held that it was in part the above normal services offered by Vigne that informed their decision. However, above normal service was also referred to in Ross, with a different conclusion, making it difficult for advisers to get comfortable with. HMRC RESEARCH REVEALS POOR AWARENESS OF BR HMRC published a research paper coinciding with the budget. 22 The aim was to understand the motivations, behaviours and attitudes underlying individuals’ decision-making process on IHT matters and the use of reliefs and exemptions in that process. One of the issues raised by HMRC’s research was that there was poor awareness of BR among owners of business assets: “Most testators and beneficiaries with business assets were unaware of BR. The few that were aware had heard about the relief from an agent, such as a solicitor or accountant. Despite their awareness, these individuals were not knowledgeable about BR. They understood that BR provided relief on their estates’ IHT bill, but did not know which assets would qualify, or the rates of the relief available (...) In contrast, agents said that their clients were normally aware of BR. Agents attributed this to clients with business assets being financially astute. Although most clients were aware of BR, agents reported that understanding of the relief was typically poor. Like the testators and beneficiaries interviewed, most clients knew nothing more than the premise of the relief.” This demonstrates the importance of the role of advisers in bringing BR to the fore and using it to drive the growth of UK companies. BR IN THE UK ECONOMY 64% OF FAMILY SMEs ARE ESTIMATED TO BE FIRST GENERATION BUSINESSES BR QUALIFYING INVESTORS CAN REPRESENT UP TO 15% OF A COMPANY’S SHAREHOLDERS OUT OF THE 964 COMPANIES QUOTED ON AIM, 280 ARE EXPECTED TO QUALIFY FOR BR