Business Property Relief (BPR) is a cornerstone of UK inheritance tax (IHT) planning, offering significant tax benefits to business owners, and is of particular interest to the family business sector as businesses are transitioned from generation to generation.
Introduced in 1976, BPR aims to facilitate the continuity of businesses across generations by reducing the IHT burden on business assets. This relief is particularly beneficial for family businesses, ensuring that they can be passed down without necessitating the sale of crucial assets to meet tax liabilities. So how does BPR work and why it is especially advantageous for family businesses?
What is Business Property Relief (BPR)?
BPR is a tax relief that reduces the value of certain business assets for IHT purposes. It can reduce the taxable value of qualifying business assets by either 50% or 100%, depending on the type of asset. Here’s a breakdown:
100% Relief: This applies to business or interest in a business and shares in an unlisted company.
50% Relief: This is applicable to shares controlling more than 50% of the voting rights in a listed company, land, buildings, or machinery owned by the deceased and used in the business.
To qualify for BPR, the business or business assets must meet specific conditions:
Ownership Period: The deceased must have owned the business or asset for at least two years before death.
Qualifying Business: The business must be a trading company and not wholly or mainly involved in investment activities.
Continued Use: The business must continue trading after the transfer.
Why BPR is Beneficial for Family Businesses?
Facilitates Intergenerational Transfer: Family businesses often rely on passing down assets and control to the next generation. BPR reduces the IHT liability, making it feasible to transfer significant business assets without incurring prohibitive tax costs. This ensures the business remains intact and operational, rather than being fragmented or sold to cover tax bills.
Preserves Cash Flow and Working Capital: High IHT liabilities can drain a business’s cash reserves, affecting its operational capabilities. BPR helps preserve the working capital and cash flow, which are vital for the business’s day-to-day operations and long-term growth.
Encourages Long-Term Planning and Stability: Knowing that BPR is available, family businesses can engage in more strategic long-term planning. It provides a sense of financial security and stability, encouraging investment in growth and innovation without the looming threat of hefty IHT.
Promotes Business Continuity and Employment: Family businesses often have a deep-rooted connection to their employees and the local community. BPR helps ensure business continuity, thereby safeguarding jobs and supporting local economies.
Fosters Entrepreneurship and Family Values: By enabling the seamless transfer of businesses across generations, BPR fosters an entrepreneurial spirit within families. It allows the next generation to carry forward the family legacy and values, while also adapting the business to modern challenges and opportunities.
As Mike Smout, partner at Gorvins adds, "It is vitally important that family businesses consider the succession plan for their business and if the shares in the family company will qualify for BPR."
"Businesses are typically classed either as a trading company (to which BPR applies) or they can be classed as an investment company (to which BPR does not apply). Although a company may have a trading element in it, if it holds a high proportion of investment property not used in the trading business or it is sitting on cash significantly higher than what is needed for working capital on a day-to-day basis, then there is a risk the company could be classed as an investment company and not a trading company."
"As a result it is key to ensure that professional advisors agree that the family business will qualify for this relief so that inheritance tax is not charged on the value of the business. It is also important to think about the next generation’s entitlement to the value of the shares. It could be that straight gifts of the shares are made on death via the will or that the shares are directed to a trust in the will for the value to be bought by the business or nominated individuals. This may well assist with future inheritance tax problems," concludes Mike.
Business Property Relief is a vital tool for preserving the heritage and economic contribution of family businesses in the UK.
By significantly reducing the IHT burden, BPR ensures that family businesses can thrive across generations, maintaining their roles as pillars of local economies and custodians of family values. For families contemplating succession planning, understanding and utilising BPR is essential to safeguard their business’s future.
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