28/07/22
Do you have a client who is a business owner? You will likely need to cover Business Relief as part of their Inheritance Tax (IHT) planning. But how can you give your clients the best chance of securing Business Relief?
Business Relief (BR) is a form of inheritance tax relief that can be claimed on certain business assets owned by a client for more than two years. It lowers an estate’s value, reducing the IHT bill that will be due upon a business owner’s death.
There is no fail-safe way to guarantee BR will be available upon disposition (either on death, in life or on certain occasions within trusts). This is because the law and HMRC’s approach and attitude are always subject to change.
However, are strategies you there can use to improve the probability of your clients securing BR.
Review paperwork and establish the facts
A client periodically reviewing their affairs and maintaining a business relief ‘paper trail’ is one of the best things they can do. Not only does this ensure that their affairs are organised in the most efficient way, but it provides a body of evidence to support any claims for BR (either by the client themselves or by their executors).
The two-year ownership requirement for BR is usually clear-cut ― little can be done to alter the facts regarding ownership of shares in the business. However, where the client is a sole trader or partner, it can be more challenging to establish when the business began. What evidence is there to support this?
Encourage your client to retain such evidence demonstrating when the company started and the business assets were acquired. This is a much easier job (as many are) for the client to undertake rather than their executors after death.
Wills
A Will is a document that determines how your assets will pass when you die. Clients should always be encouraged to put a Will and estate plan in place.
Taking this further, it has long been good practice to ensure that a client’s Will is reviewed periodically. Reviews should take place after certain life events such as marriage, divorce and the birth of children or grandchildren. Although a good Will should be effective regardless of a client’s assets at death, it is always wise to review the Will after a significant change in the size, nature or location of assets or perhaps a change in the law.
Does the Will effectively deal with any business assets that may attract BR? Some questions to ask are:
• Are the BR assets left to the spouse or a charity (possibly via residue)? This will not make the most of the relief, which could be used more efficiently.
• Are the BR assets being allowed to fall into residue? Again, this may result in dilution of the relief, which could be avoided by gifting the asset (s39a IHTa 1984).
• Could the BR assets be gifted to a discretionary trust? This would give more flexibility for succession and IHT planning. A Memorandum of Wishes should accompany discretionary trusts. It can be reviewed and amended regularly,with no formal execution necessary.
• Are the client’s executors aware of the extent and nature of the business assets? Keeping clear records is always sensible. Do the executors know they have been appointed, and do they have the necessary expertise to deal with HMRC?
• Does the Will/trust documentation give the necessary powers to enable the executors or trustees to carry on the business after death?
Partnership and shareholder agreements
The first thing to ask your clients is: is there an agreement in place?
A partnership with no agreement is merely a ‘partnership at will’ and is subject to the effects of the law, rather than any specifically drafted agreement between the partners.
This is important when estate planning is contemplated because the death of a partner dissolves the whole business unless there is an agreement to the contrary. Most written partnership agreements exclude this provision and make alternative arrangements allowing the surviving partners to continue trading.
S 33(1) Partnership Act 1890
If your clients have an agreement, what are the other terms?
A buy-out provision requires the deceased’s partner’s executors to sell the interest to the surviving partner(s). This can be fatal to the BR availability of the deceased partner’s share of a partnership.
It is advised (and accepted by HMRC as effective) that a separate cross/double option agreement is put in place, where the surviving partners have the option to purchase the interest, and the executors of the deceased have an option to ‘force’ the sale.
These points regarding cross/double option agreements are equally relevant for shareholders of limited companies, of course.
Ownership and use of assets are often key
An important example of this is a property owned by a partner used by their partnership. Such a property can attract 50% BR. However, if ownership is transferred to the partnership itself, this will increase to 100%. Does the client’s paperwork and documentation reflect this distinction? Does the Land Registry title show this?
Generally, HMRC’s view is that the partnership balance sheet is not a record or evidence of the property being owned by the partners as opposed to an individual – even if the balance sheet is signed by all the partners each year and it was the partners’ understanding that they all owned the partnership property as an asset of the partnership.
The best practice is to record by a declaration of trust that the business premises are owned as partnership property (or held for the partnership) and to specify how future capital profits and losses from the property will be shared.
Investment portfolio
The rule is that quoted shareholdings will not attract BR unless the owner is a controlling shareholder. However, shares listed on the Alternative Investments Market (AIM) are treated as unlisted for BR purposes. Therefore, they will qualify for relief at 100%, subject to the shareholding being held for two years or more before disposal/death.
Purchasing AIM shares is a recognised and accepted IHT planning tool. HMRC’s Disclosure of Tax Avoidance Schemes guidance states, ‘the act of purchasing shares in order to qualify for business property relief after two years … is not a notifiable arrangement’.
Evidence of trading activities
It is probably clear to your client what their day-to-day business activities are. However, is there paperwork to evidence this to HMRC as and when required?
BR is only available for ‘wholly or mainly’ trading businesses. This means more than 50% trading. Whether or not this is the case may not always be obvious. HMRC will consider this question by looking at the business ‘in totality’.
Again, there are questions to ask that will help your client prepare for BR:
• What proportion of the business activity is letting property as opposed to, say, selling goods? What profit is derived from each activity? What about the turnover derived? While not a determining factor, good records and accounts will help support any BR claim.
• What does the client actually do? Can they time-record or keep logs demonstrating how many hours they spend pursuing trading activities?
• What do the employees do? Are there appropriate employment contracts to evidence this? A good employment contract can detail the worker’s activities, potentially supporting a BR claim.
Many investment-based businesses will not easily attract BR. Caravan parks are a fairly common example. Some BR could be secured by the owner of a caravan park running two (or more) separate businesses. One business ‘hires’ the pitches receiving fees in return, while a separate business (perhaps run as a small limited company) provides the shop, entertainment and other ancillary services.
Excluded property
An asset not used or required for future use in the business cannot attract BR. This means that a company holding such ‘excluded property’ will have a reduced amount of BR.
This rule can be a problem where a company has more cash than is deemed necessary for its present needs. If this problem is to be avoided, there must be plans to use the cash in the business in the future (perhaps to buy a new plant or machinery). This is an area, therefore, where evidence is key.
A significant case on surplus cash in a business was Barclays Bank Trust v CIR, which provided helpful guidance on what is meant by ‘required for the future use’. The critical part of the judgment was:
‘I do not accept that ‘future’ means at any time in the future nor that ‘was required’ includes the possibility that the money might be required should an opportunity arise to make use of the money in two, three or seven years’ time for the purposes of the business. In my opinion and I so hold that ‘required’ implies some imperative that the money will fall to be used upon a given project or for some palpable business purpose.’ – Barclays Bank Trust v CIR [1998] STC (SCD) 125
Asking important questions of your clients, gathering evidence and reviewing documentation is thus crucial to helping their chances of securing Business Relief.
If you have questions regarding Business Relief, CTT Group is here to support you and your clients. Get in touch with one of our experts today.
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