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View the related Tax Guidance about Business property relief (BPR)

Understanding BPR 鈥� overview

Understanding BPR 鈥� overviewThis guidance note provides an overview of the fundamentals of BPR and the scope of the information covered in the 鈥楿nderstanding BPR鈥� sub-topic.The fundamentals of BPRBPR is a valuable relief which reduces the value of a transfer of relevant business property on which IHT is charged by either 50% or 100%, depending on the nature of the property. There are conditions as to the type of property which qualifies, the activities that the property is used for, the minimum period of ownership and its status as an ongoing business at the date of the transfer. Each condition should be carefully considered. Where the property has been subject to a lifetime gift and the transferor dies within seven years then there are additional conditions that must be met. The purpose of BPR is to ensure that businesses will not have to be broken up on a death due to the need to pay IHT.BPR is also available for trustees who are subject to IHT on a 10鈥搚ear charge or an exit charge.A key condition is that the business must not be one which is wholly or mainly the making or holding of investments, that is BPR is not available on a business which is an investment business rather than a trading business. This test is known as the 鈥榳holly or mainly鈥� test. Wholly or mainly is a 50% test.In this note and throughout the sub-topic, for ease of reference, 鈥榯rading鈥� is used to mean a business that

An introduction to inheritance tax (IHT)

An introduction to inheritance tax (IHT)This guidance note provides a background to the basic principles of IHT, including the loss to the donor principle, chargeable transfers and transfers that are not subject to inheritance tax.Background to inheritance taxInheritance tax is a tax on the value passing from one individual to another person. This typically arises when an individual dies and all of the property that they own (their 鈥榚state鈥�) passes to beneficiaries. An individual may also transfer their assets to others during lifetime. This could be an outright gift of assets to another person or a gift into trust.Assets in trust are held by trustees for the benefit of others, whose entitlement to them is restricted in some way. Special inheritance tax rules apply to trusts to reflect the separation of legal and beneficial ownership.IHT arising on a death estate is a tax on the donor 鈥� the person who is transferring the asset. It is calculated with reference to their estate. It is not a tax on the beneficiaries, though what the beneficiaries receive may be reduced by the amount of tax. This position contrasts with the law in certain other jurisdictions where 鈥榙eath duties鈥�, gift tax or the equivalent are a tax on the people receiving the property and is taxed in accordance with their status or wealth. Clients who receive an inheritance often ask if they have to pay tax on it. Generally, the answer is 鈥榥o鈥�, because any tax due has fallen on those administering

Transfer of assets to beneficiaries 鈥� legal, administration and tax issues

Transfer of assets to beneficiaries 鈥� legal, administration and tax issuesThis guidance note outlines how assets are transferred to beneficiaries and the tax consequences that flow from the transfer. Whether a payment is income or capital is discussed in the Payments to trust beneficiaries guidance note.This guidance note is designed to give outline and background for accountants and tax advisers who deal with clients establishing trusts. It is not targeted at lawyers.This guidance note deals with the position in England and Wales only. See Simon鈥檚 Taxes I5.8 for details of the provisions affecting Scotland and Northern Ireland.Three issues to consider when transferring assets to beneficiariesTrustees may decide to exercise their powers by appointing assets to a beneficiary. There are three key issues that need to be considered when making or considering such a transfer:鈥�how they must document the exercise of their powers鈥�the formalities that should be complied with to transfer the asset鈥�the tax consequences of the transferDocumenting the exercise of the trustees鈥� powersThe deed may require the exercise of the trustees鈥� power to be documented by deed. If no deed is required then the trustees decision and actions can be recorded by a written resolution. However, it is important that the correct documentation is prepared. If an appointment requires a deed but is made without one then the appointment is void.A deed should be used where the trustees require an indemnity for tax or other expenses.Preparing deeds is a reserved legal service and is regulated by

Succession planning鈥� overview

Succession planning鈥� overviewThe planning for passing on a family company or business to future generations should be done well in advance of the current owners taking retirement or dying. There will be issues around who the business should be passed on to, for example, the owners鈥� children , employees of the company or a sale to a third party. It will also have to be decided whether the owners want to continue receiving income from the business and whether they wish to still have some involvement through maintaining share ownership. There are also tax considerations to bear in mind especially involving CGT and IHT. This guidance note summarises some of the succession options and links to further technical commentary. The succession options reviewed here are as follows:鈥�transferring the assets on death to the children of the owners鈥�transferring business assets by way of a gift during the lifetime of the owners鈥�purchase of own shares by the company鈥�buy-out by family members or management鈥�passing the business over into an employee ownership trust (EOT)鈥�keeping the company as a family investment company (FIC)鈥�sale to a third party Transferring business assets on deathThe owners of a family company may want to keep their shares until they die and then pass them onto their children at death. For tax purposes this can have advantages as unquoted shareholdings meeting the qualifying conditions in a trading company will qualify for 100% business property relief (BPR) reducing the value transferred for IHT

Sale of shares from a deceased estate

Sale of shares from a deceased estateThis guidance note explains how postmortem relief for inheritance tax can be obtained where quoted shares or securities are sold by executors or trustees of a qualifying interest in possession taxed on death within a year of death.Sale of shares relief 鈥� principlesIf shares are sold in the year following death at an overall loss, relief may be available by substituting the sale price of the sold shares for their death values, thus generating a repayment of inheritance tax. The sale must take place by the appropriate person (see below). The basic conditions for claiming the relief are summarised as follows. Each condition is discussed further below:鈥�the shares sold must be 鈥榪ualifying investments鈥欌��the sales must occur within 12 months of death鈥�the shares must be sold by the 鈥榓ppropriate person鈥欌��there must be an overall loss on the sales of the qualifying investmentsIHTA 1984, s 179(1)This relief does not apply to shares transferred in the deceased鈥檚 lifetime, but a separate relief may be available. See the Fall in value relief guidance note. Qualifying investmentsQualifying investments include:鈥�quoted shares and securities (including those quoted on a recognised foreign stock exchange). The shares must be quoted at the date of death鈥�unit trusts鈥�open-ended investment companies (OEIC)IHTA 1984 s 178(1); IHTM34131鈥揑HTM34141HMRC takes the view that shares quoted on the Alternative Investment Market (AIM) do not qualify for relief. This position is consistent with their treatment of AIM shares as unquoted for the purposes

Expenses and liabilities

Expenses and liabilitiesThis guidance note discusses the expenses and liabilities that can be deducted when calculating a transfer of value for inheritance tax purposes. It discusses the general principles applicable as well as specific provisions about deductions in the Inheritance Tax Act and the anti-avoidance legislation that has restricted deductions in some cases. This note also covers which asset the deduction for the liability can be taken from and how to deal with outstanding tax liabilities. General principlesExpenses and liabilities will reduce the value of property to be charged to inheritance tax. The deduction of liabilities is restricted in some circumstances by anti-avoidance legislation and these are covered below.The value of any property for inheritance tax purposes is 鈥榤arket value鈥�. The market value of assets is reduced by liabilities. The practical application of these general principles to the valuation of property for IHT means that, for example:鈥�the value of a death estate is reduced by the deceased's outstanding personal debts such as household bills and credit cards鈥�the value of a gift (eg a house) is reduced by liabilities attached to it (eg a mortgage)鈥�the value of settled property is reduced by the trustee's outstanding debts such as professional feesSee Example 1, which also illustrates some of the principles described below.Specific provisionsThe general principles are qualified and expanded by a number of specific legislative provisions.Liability must be legally enforceableA liability is allowed only if:鈥�it is imposed by law鈥�it was incurred for consideration in money or

Woodlands

WoodlandsWoodlands may attract one of three different types of relief from inheritance tax (IHT) depending on the nature of the land and timber operations. These are:鈥�agricultural property relief (APR) covered in the Agricultural property relief (APR) guidance note鈥�business property relief (BPR) covered in the BPR overview guidance note鈥�or woodlands reliefThis note concentrates on woodlands relief but APR and BPR are also considered briefly below.Woodlands may obtain APR if they are occupied with agricultural land or pasture and their occupation is ancillary to that of the agricultural land or pasture. An example is a strip of woodland acting as a wind shelter for farmland. Alternatively, woodlands may qualify for BPR if they are run as a commercial business (eg orchards or nurseries) or otherwise generate business profits by regularly producing timber.APR and BPR are usually to be preferred to woodlands relief. This is because, effectively, APR and BPR provide the equivalent of an exemption from IHT (at 50% or 100% of the relevant value of the property) whereas woodlands relief only defers IHT. Moreover, woodlands relief only defers the IHT on the timber, not on the underlying land. However, there will be occasions when woodlands are either not associated with agricultural property or are not part of commercial operations (eg where held as part of a private estate or as an investment) and so woodlands relief needs to be considered.The remainder of this note concentrates on woodlands relief.Outline of woodlands reliefIt is only possible to claim this

Property investment or trading?

Property investment or trading?Outline of property investment vs tradingThis guidance note applies to both individuals and companies.The distinction between income and capital profits is crucial to many areas of tax law and is a common issue for property transactions. Often it will be quite clear cut as to whether the activity is trading or investing in land. A person buying property to let out long term will be making a property investment, whereas someone buying a property to refurbish and sell (鈥檉lipping鈥�) will most likely be trading as a property dealer or property developer. However, where is the line to be drawn between activity regarded as dealing and activity regarded as investment?First, it is important to realise that the tests for whether one is dealing in property or making a property investment are the same as for any other trade. Therefore, a good place to start is to look at the 鈥榖adges of trade鈥� and considerations will include:鈥�profit seeking motive鈥�frequency and number of similar transactions鈥�modification of the asset in order to make it more saleable鈥�nature of the asset鈥�connection with an existing trade鈥�financing arrangements鈥�length of ownership鈥�the existence of a sales organisation鈥�the reason for the acquisition or saleThe badges of trade are not a statutory concept but are a recognised set of criteria developed by the courts to identify when a person is undertaking a trading activity. They can be applied to property transactions just as they can to a variety of

Demergers 鈥� overview

Demergers 鈥� overviewThis guidance note gives an overview of why and how companies and groups demerge, and the aims and process of tax planning for demergers.In simple terms, a demerger involves the separation of a company鈥檚 business into two or more parts, typically carried on by successor companies under the same ownership as the original company.Companies (and groups) may want to split out their activities for many different reasons. There may be a desire to focus management on one specific part of the business or there may be conflicting interests between shareholders. There could also be legal reasons to separate a trade out from the rest of the group (eg to ring fence liabilities). It may be the only way for a purchaser to be able to buy certain parts of the business. While demergers are usually triggered by a variety of commercial reasons, a business undergoing a demerger will also want to minimise, and ideally eliminate, any tax charges arising on the demerger.The different mechanisms for achieving a tax efficient demerger fall into three main categories:鈥�statutory demerger鈥�demerger by way of reduction of share capital (often referred to as a capital reduction demerger)鈥�demerger by Insolvency Act 1986, s 110 demerger (also known as a liquidation demerger)For each of these demergers there are tax provisions which should mean that, for tax purposes, a qualifying distribution is exempt and as such there is no income tax for the shareholder.The decision as to which demerger mechanism to use will

Agricultural buildings

Agricultural buildingsThis guidance note summarises the treatment of agricultural buildings in farms including what capital allowances can be claimed, the assessment of farm buildings which are let out, repairs and renewals and the possible effect of having redundant farm buildings on tax reliefs.More details of the IHT position of specific buildings can be found in the following guidance notes:鈥�Agricultural tenancies鈥�APR and the farmhouse鈥�APR and farmworkers' cottages鈥�Agricultural value and development valueDefinition of plant not buildingA large amount of expenditure in relation to a modern building relates to items of plant and machinery. The farmer or landowner may identify such expenditure and claim the appropriate capital allowances and annual investment allowance (AIA) in accordance with the rates available. These are generous with the AIA limit at £1,000,000. All appropriate conditions must be met. See the Annual investment allowance (AIA) guidance note for more information.The ability to claim AIA on plant applies as much to a second-hand building as a new one. It can be quite normal practice for farmers to buy second-hand barns. The apportionment between the categories depends on the valuation techniques and requires knowledge of building construction.The 鈥榓fter-tax鈥� cost of funding a new diversified venture will be affected by whether expenditure is treated as buildings or plant. There may well be borderline cases where planned expenditure could be regarded as plant. However, there are certain items of expenditure where the legislation is clear as to what it deems to be plant alterations to buildings incidental