Tax Planning

A recent piece of work carried out for an IFA and a recently reported inheritance tax case reminded me of the importance of remembering the fundamentals when considering estate planning for those with their own business.

One of our IFA clients arranged to bring one of his clients to us to discuss estate planning. The client had a number of businesses and properties. He was married and had children, both at university. There was a decent private residence and some private investments, including the usual collectives, Isas, Peps and cash.

At the meeting, the client&#39s worries about inheritance tax were quickly dispensed with.

The majority of the client&#39s businesses were trading companies and their assets were all relevant business property. There was cash in the businesses but it was used as working capital and there were no long-term investments held.

All of this meant the IHT problem was much smaller than first envisaged. Simply imparting the information that IHT business property relief existed and would operate to reduce the liability substantially was valued immensely by the client. It gave him increased peace of mind by removing the anxiety that went along with thoughts of making lifetime gifts to minimise what would have been a substantial liability without business property relief.

The client was unaware that to put the business shares into trust would have constituted a disposal for capital gains tax purposes. His sentiment that this was a bit unfair was understandable. However, that would have been the case unless holdover relief was claimed, which it would have been had the transaction gone ahead. There was also the fact that the benefit of the CGT uplift on death (if the shares were kept by the client) would have been lost.

Being informed that business property relief was available and what its effect would be was of great value to the client. It brought a sense of relief and avoided the expenditure of time and effort on avoiding tax on an asset that, under current law at least, would not have been chargeable.

In our experience, business property relief and agricultural property relief are probably two of the main reasons why IHT is not high on the tax planning priorities of business owners and farmers.

If business property relief is so valuable, it is important for tax planners to be reasonably conversant with its workings. At a simple level, it is not difficult to understand and the contents of the table below should be familiar.

The minimum period of ownership to qualify for business property relief is, broadly, the two years immediately preceding the transfer.

In the case of agricultural property, the qualifying period is satisfied either if the donor occupied the property for the purpose of agriculture for a period of two years immediately prior to the transfer or if he owned the property for seven years before the transfer and throughout the period the property has been occupied for the purposes of agriculture.

For the purposes of the application of business property relief and agricultural property relief, the net values of the qualifying assets must be used, that is, broadly speaking, after deduction of any loans secured specifically on the assets.