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Business property relief (BPR) is a relief from inheritance tax (IHT) for certain shareholdings or interests in a business known as relevant business property (RBP). Everyone in the UK has an inheritance tax allowance of £325,000, known as the nil-rate band. Inheritance tax must be paid on the estate for anything valued higher than this amount, usually at the 40% rate.
If certain conditions are met, BPR can provide relief from IHT at either 100% or 50%, depending on the RBP being transferred. Therefore, BPR is a very valuable relief that many business owners will seek to take advantage of when it comes to succession planning.
To qualify as RBP, the following conditions must be satisfied:
Even if the property in question satisfies the above conditions, BPR will not be available where the RBP is subject to a binding contract for sale at the time of the transfer (known as the binding contract trap).
The binding contract trap is effectively a clause contained within legal documentation such as a shareholder’s agreement, which obliges the personal representatives of deceased partners, directors, or shareholders to sell the RBP to the surviving business owners, who in turn are obliged to purchase.
In the presence of such a clause, BPR will not be available. This is to ensure that BPR is only available where a transfer involves a business asset rather than the cash proceeds of a sale.
To avoid the binding contract trap, BPR should be considered at the outset when drafting legal documentation such as wills, shareholder’s agreements or articles of association.
Arrangements for the transfer of RBP contained within legal documentation can be structured and drafted in such a way to ensure that BPR remains available. For example, HMRC will generally accept the following clauses (which do not create a binding contract for sale):
The rate of relief available will depend upon the type of RBP in question.
100% relief will be available on:
50% relief will be available on:
Ignoring the impact of IHT could be a costly oversight. For the financial year 2020/21, HMRC reported IHT receipts of £5.33 billion. Therefore, careful consideration should be placed on the reliefs available and how these may significantly improve your overall IHT bill.
The Commercial and Wills, Trusts and Probate teams can assist with drafting such documentation and reviewing the terms of any such arrangements to ensure the relief remains available. If you would like to discuss business property relief in further detail, you can contact our team below.
Complete the form below, or alternatively, you can call Myerson Solicitors on: