Summary. Securing IHT business property relief (BPR) can reduce inheritance tax on a business or its assets. Though BPR-qualifying shares can be passed on tax-free after two years, new rules limit tax avoidance, especially with loans. Utilising personal savings to fund a business ensures maximum BPR and preserves its IHT value.
How can you secure IHT business property relief? Any ownership of a business, or share of a business, is included in the estate for Inheritance Tax (IHT) purposes. However, a business can qualify for relief from inheritance tax. Business Relief reduces the value of a business, or its assets, when working out how much inheritance tax has to be paid. But, what many people don’t know, is that if you’ve borrowed money to support the business, relief may not be available.
Inheritance Tax on Property
Business Property Relief (BPR) has been an established part of inheritance tax on property legislation since 1976. Once BPR-qualifying shares have been owned for at least two years, they can be passed on free from inheritance tax on the death of the owner/shareholder. However, a few years ago, new rules were introduced that targeted tax avoidance. This means that BPR is not a sure thing.
Debts and Assets
The scope of BPR has evolved over the years. The new rules were in a bid to limit schemes that reduced IHT using debts, such as loans. Loans could be used to reduce the value of the asset for IHT purposes.
Finance Act (FA) 2013
Following the Finance Act (FA) 2013 changes, business owners can no longer obtain IHT relief on loans used to fund their business, that have been secured on their home. Before FA 2013, doing so could carry an IHT benefit. This is because of the general rule that an encumbrance on a property, reduces the value of that property for IHT purposes. This meant that if you were to die, the business would be passable for BPR. As well, the chargeable value of the home would be reduced by the mortgage. However, the new(ish) rules mean any borrowing used to finance the purchase of BPR eligible shares (and other qualifying BPR assets), must be deducted against the value of those shares, etc, for BPR purposes.
Inheritance Tax Allowable Deductions
Following the introduction of the Finance Act (FA) 2013, a loan secured on a non-business asset, such as your home, which is used to fund your business, will reduce the value of the business first, instead of the asset it’s secured on. It’s important to note that the same rule applies to loans/debts created before 2013.
The Best Way to Secure IHT Property Relief
So, what is the best way to secure IHT business property relief? If circumstances allow it, the best option when it comes to funding your business, is to use your own savings. Then, if you need to replenish this account you can take a loan out to do so (the longer you wait the better). This means that in the event of you passing or gifting your business, it can be argued that the loan was not used to fund your business, but to buy investments. This will secure you maximum BPR. It will also protect the value of your business for IHT purposes, as it would be unaffected by the loan.
Thomas Nock Martin | The Small Business Tax Specialists
We are specialists in IHT business property relief which means we can offer the right guidance for your circumstance. Call us today on 01384 261300 or visit our website for more information. Let us help your business.