Before last week’s article on non-doms I was writing about developments in IHT business property relief. In particular I looked at the recent ICAEW guidance note on the impact of cash held in a business (when it will and will not be treated as an ‘excepted asset’ for IHT purposes) and the impact, for partnerships and LLPs, of holding trading company shares.
In the latter case it seems that if the LLP or partnership is a trading business and holds the shares to use in the business then, if it is wholly or mainly a trading business, the holding of the shares need not remove eligibility for BPR.
HMRC confirms that the business can qualify as a ‘hybrid’ business. If the partnership or LLP is trading but the shares are not used in the business, BPR may be limited by virtue of the excepted assets provisions.
But if a partnership or LLP structure exists wholly or mainly to hold shares in a company – a quasi holding company – given that it is opaque for IHT purposes the interest in the LLP or partnership will not qualify for BPR.
But this is not so, it seems, where a company holds shares in a trading LLP. In this case the transparent nature of the company for IHT will mean that BPR could be available to the shareholders in the company that holds an interest in the trading LLP.
This could be helpful, from an IHT standpoint, to companies that are holding cash to invest and the shareholders are concerned to minimise IHT.
Rather like an individual in the same position, subject to acceptable levels of risk, investment in an unquoted trading entity could well be worthy of consideration. Some investment management and tax solution businesses offer these structures for investment.
As is often the case with me – and hopefully some of you – when I read about a specific and current development I remind myself of the fundamentals to fully appreciate the meaning or relevance of the development.
So I did that in relation to BPR and, in particular, the qualifying conditions.
Apart from the two-year ownership condition, the property needs to be ‘relevant business property’ if it is to qualify for BPR.
The definition is wide and includes most businesses and land, buildings or plant used by a business for the purpose of the business but owned by a partner or a controlling shareholder using the asset.
Before getting too carried away you should remember that if the business is wholly or mainly an investment business then it cannot be relevant business property. This means that if it carried on a ‘bit of trading’, relief will still be totally denied.
It is also worth remembering that BPR is not only available at 100 per cent.
The following interests, while qualifying as relevant business property (provided the business is not wholly or mainly an investment company), will only qualify for 50 per cent relief:
- Quoted shares which confer control (shares in quoted companies that do not confer control do not qualify for BPR at any level).
- Any land, building, machinery or plant used wholly or mainly for the purposes of a business carried on by a company controlled by the transferor or by a partnership of which they are a partner.
- Any land, building, machinery or plant which is settled property in which the transferor has an interest in possession and which is used wholly or mainly for the purposes of a business carried on by him (IHTA 1984, s105).
For the purposes of BPR, shares or securities are quoted if they are listed on a recognised stock exchange (IHTA 1984, s 105 (IZA)). Unquoted shares are those shares which are not listed. Shares dealt on AIM are regarded as unquoted (HMRC Inheritance Tax Manual, para 25192).
IHTA 1984, s267A provides that property to which an LLP is entitled or uses is treated as property to which its members are entitled or which they occupy or use as members, so will be relevant business property. For most SMEs that trade, BPR will be a given.
There may be some limitation due to surplus cash or other non-trading assets but generally the whole value of the business or shares in it will qualify for BPR. It is important SME-owning taxpayers appreciate that the availability or otherwise of the relief will depend on each case.
Investors seeking to gain 100 per cent BPR will look to EIS/AIM shares and not quoted shares – so not VCTs being quoted.
There is a fair bit of choice and the availability of BPR on an investment that also delivers investor access and control without needing to wrestle with the GWR or POAT provisions could prove attractive.
Advice is essential though.
Tony Wickenden is joint managing director of Technical Connection
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