Whilst the proportion of family businesses that pass to the next generation remains on the decline, for those that do, Business Relief can provide up to 100% relief from inheritance tax (IHT) on shareholdings passing/transferred. There are a good number of tests and traps to be wary of, but in a ‘hybrid’ business (i.e. one with both trading and investment activities), Business Relief is often detrimentally misunderstood.
In simple terms, a company must be a “qualifying business” in order for the shares to be eligible for Business Relief. A business is qualifying for this purpose, unless it consists “wholly or mainly” of dealing in stocks, shares or securities, land and buildings, or making or holding investments. Or, in other words, a company that is wholly or mainly something else will qualify.
The term “wholly or mainly” implies a test of 50% or more. Case law has established that it is a qualitative test rather than, for example, simply looking at the relative size of different income streams where there are both trading and investment activities. As long as this wholly or mainly test is met, then shares may be eligible for a 100% relief from IHT. The relief is restricted where there are “excepted assets” that the company is holding, which will reduce the Business Relief available. An asset is an excepted asset if it is neither:
- used wholly or mainly for the purposes of the business (over a defined period of time); nor
- required at the time of death for future use in the business.
This makes sense, as this prevents one using the company to house personal non-business assets to avoid IHT.
However, in the context of a “hybrid” business the word business means the composite business activities. So, for example, in a company with established trade and a small portfolio of investment properties let to third parties, the investment properties will still form part of the ‘business’ of the company and would not be treated as ‘excepted’. Only personal non-business assets (for example a family holiday home) would not be so beneficially treated. The company must of course meet the “wholly or mainly” test for Business Relief to apply.
We have seen, first hand, how other advisers fail to understand this and other intricacies of the Business Relief rules in the context of family businesses; both individual companies and in corporate group situations. Without detailed knowledge and understanding of how the rules work, it’s impossible to plan ahead and make the most of reliefs such as this. To find out more, get in touch with one of our Private Client experts.
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