In policy terms, Business Relief was introduced to reduce the risk of Inheritance Tax charges resulting in the break up of a viable business in a succession situation where for example a family business is left to the next generation – the preservation of business is seen as good for the economy. There are, however, a number of other options as regards this useful allowance which is not just for business owners.
The rates which can be claimed are either 50% or 100%.
50% relief is available on (a) shares controlling more than 50% of the voting rights in a listed company, (b) land, buildings or machinery owned by the deceased and used in a business they were in a partner in or controlled and (c) land, buildings or machinery used in the business and held in a Trust that it has right to benefit from.
100% relief is available on (a) a business or interest in a business and (b) shares in an unlisted company. Shares in an unlisted company include those held on the Alternative Investment Market (often referred to as “AIM holdings”).
In order to qualify, the person who died or gave away the assets needs to own the assets for at least two years prior to their death or gifting. Also, the recipient must keep them as a going concern until the death of the donor if they want to keep the relief. Otherwise, a period of seven years must pass from the date of the gift.
Business Relief can not be claimed if the business (a) mainly deals with securities, stocks or shares, land or buildings, or in making or holding investments, (b) is a not-for-profit organisation, (c) is being sold, unless the sale is to a company that will carry on the business and the estate will be paid mainly in shares of that company or (d) is being wound up, unless this is part of a process to allow the business of the company to carry on.
You also can’t claim Business Relief on an asset if it isn’t needed for future use in the business.
A business which only generates investment income will not attract Business Relief, so this excludes a residential or commercial property letting business, a property dealing businesses and a serviced office business.
In recent years, what has become far more popular as an Inheritance Tax saving vehicle is investing in AIM holdings. In years gone by, these holdings have had a rather negative press due to the fact that they were perceived as being incredibly high risk, bore no income/dividends and attracted steep administration charges. That has all changed quite a bit recently and the amount of providers offering such as service has increased which has led to a better, more cost efficient option for investors. The attraction of such an investment is that so long as the person owns it for more than two years prior their death then it should benefit from 100% relief from Inheritance Tax. We have therefore noticed a sharp rise in the amount of clients investing in such holdings.
Should you wish to discuss any these matters then please get in touch with our Private Client Team.
Alan Thomson is a solicitor in our Private Client team. If you have any questions business relief and Inheritance Tax planning, please contact Alan on 0131 225 8705, email firstname.lastname@example.org, or alternatively contact a member of our Private Client team