North East tax experts reveal how shareholders can benefit from special inheritance tax relief - sponsored feature

Deloitte advises those who own shares in unquoted trading companies on how to benefit from an inheritance tax relief - sponsored feature

www.crestphotography.co.uk L-r: David Hicks, Rob Morgan, Gordon Rowell, Stephen Hall
L-r: David Hicks, Rob Morgan, Gordon Rowell, Stephen Hall

Individuals who own shares in unquoted trading companies are able to benefit from a special inheritance tax (“IHT”) relief known as Business Property Relief (“BPR”), provided they have owned the shares for a period of two years or more.

This relief essentially removes from an individual’s estate (for IHT purposes), the full value of their company shares (which in many cases account for the majority of the business owner’s wealth).

As such, the relief is often considered to be incredibly valuable to the shareholders (as well as his/her family) and it is therefore of the utmost importance that minor administrative mistakes do not see BPR claims rejected, potentially costing the family up to 40% in unnecessary IHT costs.

The major pressure point on BPR is the trading nature of the business, as only trading businesses/companies benefit from the relief. Investment companies or property dealing companies are not BPR eligible companies and full IHT would therefore be payable against shares held in such companies.

The trading position for many businesses is normally very clear to see i.e. it is usually obvious that a mechanic is carrying out a trade. He would usually be actively seeking profits though the fixing of cars etc. He would not be passively awaiting an income yield (as would typically be the case with investors).

However, the waters can be muddied where ‘typically’ trading businesses own commercial properties say, which they rent out for a profit. Where businesses find themselves in situations such as these, the availability of BPR could be less clear cut as the rents received could see the business swing from being deemed to be trading in nature (and therefore benefitting from BPR) into investing (where BPR cannot be claimed).

What to do next

Square One Law, Brewin Dolphin and Deloitte have joined forces to offer advice on personal finance from a wealth management, legal and tax perspective.

For general enquiries about financial planning, please call on 0191 230 7060. This number will take you through to the Brewin Dolphin team who will pass on your query to the relevant expert.

Alternatively, fill in the form at the bottom of this article to outline your enquiry. Our experts will respond to your enquiry within three working days by your preferred method of contact.

The key issues you may need to discuss with an advisor are outlined as follows:

When does BPR apply?

For BPR to apply, the business must be wholly or mainly trading in nature. ‘Mainly’ in this context means more than 50% and we therefore apply this test to the following factors to work out whether, when looked at in the round, the company would be considered to be trading:

  • More than 50% of the turnover is from trading activities.
  • More than 50% of the profit are from trading activities.
  • More than 50% of the capital employed is trading capital.
  • More than 50% of the time spent by employees is on trading matters.

If HM Revenue & Customs (“HMRC”) are able to successfully argue that less than 50% of the business is trading, they will deem that it is an investment business by its very nature, and BPR would therefore not apply.

The difficulty with this 50% cliff edge is that it is very easy for a business that has been trading historically, to slip into “investing” without even realising it.

Let’s consider the following example

Mr X owns a haulage business and he has been operating the business for a number of years from a city centre depot (which the company owns).

Following a discussion with his business advisors, Mr X later decides that he could make much larger profits by simply adjusting his business model. In short, he decides to move to a new, significantly cheaper site out in the countryside. Given the nature of Mr X’s haulage business, it is decided that an expensive city centre location isn’t necessary and it is felt that a good rental yield would be available on the city centre plot due to its fantastic location.

As hoped, the company begins to enjoy a significant rental yield, which has helped more than double the turnover and profit of the business. The plan clearly worked, but what Mr X didn’t consider, was how these changes would affect his BPR position.

Suddenly he has a business that is ‘mainly’ investing in nature (for BPR purposes) and it is therefore no longer eligible for BPR relief.

Mr X may not even notice that this change has occurred as he still sees his business as a trading haulage business, and it may not be until such time as Mr X dies, before the BPR position comes to light and HMRC collect their 40% IHT.

It is therefore important that business owners look at their businesses in the round, and consider whether it is possible that HMRC could consider it to be a non-trading business, and if they do, they should take action.

If Mr X had spotted the issues prior to death, he could have taken advice in his lifetime and would have been presented with some options to remedy his position.

One alternative could be a demerger, which would essentially mean that the property be stripped out of the company and put into a new one. This would require clearance from HMRC and so will be fact-dependent.

Mr X would then be the shareholder of two companies, one of which would be a trading company (the haulage business) which should qualify for 100% BPR.

The new company would be a property rental business. There would be no BPR available on the value of this company, although Mr X’s position would be greatly improved as, instead of losing BPR altogether, he would have essentially ring-fenced the non-qualifying element, thereby restricting the amount of IHT payable to HMRC.

An alternative solution may be to use a holding company to separate the trade and investment assets. This requires careful planning to ensure the structure fits within the allowable criteria set out in tax legislation, but with advice and thought, the activities could be kept in the same group.

If you have a business which carries on a trade, but also houses properties or excess cash, you should consider asking a specialist to review the position. Alternatively, if you are considering gifting your business to somebody, and you are uncertain whether it would be treated as trading by HMRC, it is possible to seek an advance assurance from HMRC on your behalf to confirm their view on the status of your business.

What to do next

Square One Law, Brewin Dolphin and Deloitte have joined forces to offer advice on personal finance from a wealth management, legal and tax perspective.

For general enquiries about financial planning, please call on 0191 230 7060. This number will take you through to the Brewin Dolphin team who will pass on your query to the relevant expert.

Alternatively, fill in the form below to outline your enquiry. Our experts will respond to your enquiry within three working days by your preferred method of contact. If you can't see the form below - click here to open in a new window.

Any investment mentioned in this article is for illustrative purposes only and is not intended as investment advice. Any tax advantages mentioned are based on current legislation accurate at the date of print which is subject to change. The opinions expressed in this document are not the views held throughout Brewin Dolphin. No Director, representative or employee of Brewin Dolphin accepts liability for any direct or consequential loss arising from the use of this document or its contents

Brewin DolphinBrewin Dolphin

Brewin Dolphin is one of the leading providers of wealth management services in the UK and we have been helping clients make their money work harder through economic ups and downs since 1762.

In an age of widespread digital communications, we still believe that getting to know you personally and understanding your aspirations is the key to success. We tailor investment portfolios to your needs and provide a full range of financial planning services to create a meaningful strategy that will meet your financial and lifestyle goals.

With a large office in Newcastle, we have an expert team of investment specialists and financial planners who can help you to develop a sound strategy for managing your financial affairs and safeguarding your long-term wealth.

For more information, please visit www.brewin.co.uk/newcastle


Business & IP Centre NewcastleDeloitte

Deloitte is a leading professional services firm, with an office in Newcastle, which provides audit, consulting, financial advisory, risk management, tax and related services. Its diverse North East client base ranges from owner-managed businesses to multinational corporations.

For more information, please visit www.deloitte.com


Square One LawSquare One Law

Square One Law is an entrepreneurial, commercial law firm, based in Newcastle upon Tyne. The firm offers a wide range of legal services including: banking, commercial, commercial property, corporate, employment, litigation and private client. In 2014 Square One Law was awarded Insider Dealmaker’s “NE Corporate Law Firm of the Year”.

For more information, please visit www.squareonelaw.com

Journalists

David Whetstone
Culture Editor
Graeme Whitfield
Business Editor
Mark Douglas
Newcastle United Editor
Stuart Rayner
Sports Writer