Business Property Relief – Valuing shares in unquoted companies
It is widely known that the value of qualifying businesses can attract business property relief (BPR) at 100% for inheritance tax (IHT), but it is worth reflecting on what value does qualify in practice. A full detailed explanation of the relief as it applies to shares, interests in partnership and sole traders is beyond the scope of this article. Instead it focuses, in broad terms, on some key traps and pitfalls for the unwary shareholder.
The value of shares in unquoted trading companies have the potential to attract relief at 100% if the shares have been owned for two years and are not subject to a binding contract for sale but there are two exclusions which can apply.
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- If the company’s business is wholly or mainly one of dealing in securities, stocks or shares, land or buildings or making or holding investments, no relief is due at all.
- The second applies to ‘excepted assets’ held by the company, defined as assets which
- have neither been used wholly or mainly for the purpose of the business throughout the whole of the previous two years; nor
- are required at the time of the transfer for future use for those purposes. In this second case it is important to maintain a contemporaneous record of why the cash is held.
In cases where a company owns excepted assets a proportion of the shares’ value will not attract relief based on the value of those excepted assets.
In terms of the company’s activities, BPR requires the company to be wholly or mainly, ie at least 51%, trading. This is somewhat less limiting than the test applying for capital gains tax entrepreneurs’ relief and holdover relief purposes which require the company’s activities to be in excess of least 80% trading, but it is still a risk for some companies.
The requirement to be wholly or mainly trading can catch out trading companies which change the nature of their activities over time to include an investment activity alongside the trading activity. Such companies can cease to qualify without the shareholders realising because unlike the position with excepted assets, once the 51% test is failed the whole value of the company loses relief, ie it is an all or nothing relief.
An example would be a property development company that increasingly retains developed property for rental purposes.
Similar rules to those above apply to groups of companies, but with the added complication that BPR conditions must be considered at both individual company and group levels.
Where a company does change its nature over time it can be appropriate to make a lifetime gift of shares, rather than to hold the shares until death to secure a CGT-free uplift on death in the mistaken belief that BPR will apply. The timing of the gift can be crucial because if holdover relief is to be claimed, other than on a transfer into a relevant property trust, then it is too late once the non-trading activities reach 20% even though BPR is still accessible.
Property owned outside the Company
A further key point in relation to BPR relates to premises owned personally by the shareholder of a qualifying company and used wholly or mainly in that company’s business. On the face of it this looks like a business asset but the property’s value will only attract BPR if the company is controlled by the individual and then the rate of relief is only 50%, as opposed to the 100% relief which might apply to the value of the shares themselves.
The BPR and CGT limits catch many shareholders out and need to be kept under regular review so that any appropriate action can be taken at an early stage.
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