Business Relief – what is it and will my business qualify?

Requirements to qualify

Business Relief is available on transfer of certain types of business and business assets subject to a two year minimum ownership period.  The transfer can either take place during lifetime or on death.

Subject to certain conditions, Business Relief can be claimed for:

• a sole trading business;
• a share in a partnership;
• unquoted shares (including AIM shares);
• a holding of shares or securities in a quoted company that gives you control of the company; or
• buildings, land, plant or machinery owned by a partner or controlling shareholder and used wholly or mainly in the business.

In order to secure Business relief, the business must be trading in nature, carried on for a gain, rather than a business mainly or wholly engaged in dealing in securities, stocks and shares, land, machinery and buildings, or in making/holding investments.  Case law has established that ‘mainly’ trading equates to at least 50% and factors such as turnover, profits and asset base may be considered individually, but the business will be assessed as a whole.

Trading vs investment – some examples of businesses that may not qualify for relief

Examples of businesses that typically struggle to secure Business Relief are aparthotels and furnished holiday lets.  There is extensive case law and the view is generally taken that these are investment businesses. It is determined on a case by case, facts basis but it must be weighed up whether the business is an investment in land with ancillary services or it is a service business with an ancillary investment in land. The businesses in the few cases that have succeeded in claiming Business Relief have provided a high level of additional facilities and services in addition to basic provision of accommodation.

Horse livery is another business type where it is challenging to successfully claim Business Relief. For a successful claim, more than just the stable rental and use of land is required. Again, it is expected that additional facilities and services are offered, to demonstrate the trading nature of the business.

Potential Pitfalls

A few miscellaneous areas where businesses can unknowingly come unstuck when it comes to Business Relief are:

• Cross-option agreements – if you have one in your governing documents, this must be structured carefully to avoid losing Business Relief.
• Cash – if the business has significant surplus cash that isn’t earmarked for a specific purpose, Business Relief may be lost.
• How the business assets are owned – i.e whether they are held within the business or by you personally. This makes a difference to the rate of relief available – see below.

Rates of relief

Business relief is available at 100% for:

• a business or interest in a business, or
• a holding of shares in an unquoted company.

Business Relief is available at 50% for:

• a holding of shares in a quoted company giving more than 50% of the voting rights,
• land, buildings or machinery used in a business (but owned by the deceased) in which the deceased was a partner or controlling shareholder; or
• land, buildings or machinery held in trust, where the deceased had a right to benefit and the asset was used in their business.

An uncertain future

Whilst there doesn’t appear to be any imminent changes to the rules, inheritance tax is continually under scrutiny and particularly with the upcoming election and possible change in Government, it is a case of ‘watch this space’.

The Institute of Fiscal Studies (IFS), has recently suggested abolishing Business Relief on AIM shares, which it estimates would generate a minimum of an additional £1.1 billion in tax, rising to £1.6 billion by 2029/30. The argument is that because AIM shares are held at arm’s length, like regular shares, granting relief on them doesn’t accord with the original rationale behind Business Relief.

The IFS also suggested potentially capping or abolishing Business Relief entirely. IFS suggest capping the relief at £500,000, as it estimates that this would capture most of the revenue gains that would be achieved by total abolition.  This would raise an additional £1.4 billion in tax in the current tax year, rising to £1.8 billion in 2029/30.

Another speculative change doing the rounds is that the threshold for ‘mainly’ trading may be increased from 50% to 80%.  This would make it harder for businesses that have diversified to qualify for Business Relief.  This could particularly effect farming businesses, as most undertake some form of investment activities such as the letting of property.

Potential issues to consider

There are various things to consider to ensure your business is structured for optimal Business Relief (although it must always be said that one mustn’t let the tax tail wag the dog).  Together, the specialists in our Corporate and Wealth Preservation teams can review your personal and business affairs, including the business’ governing documents, to help you plan for its succession in a tax efficient way. Contact us if reading this has raised queries for you.