Mark McLaughlin

Introduction

Business Property Relief (BPR) is a very important and valuable relief from inheritance tax (IHT). It reduces the value upon a transfer of certain types of business or business property by a specified percentage. The current BPR rates are 100% and 50% respectively. The actual rate of relief depends on the type of business property. It is available for lifetime transfers, or to relevant business property included in an individual’s estate on death. The law on BPR is contained in IHTA 1984, ss 103-114. The relief must be claimed. A number of conditions must be satisfied before the relief is available, and a number of potential traps exist for the unwary.

The following query (from 'parkend') concerns the availability of BPR in respect of replacement property, and also the position if a business asset has been sold but not replaced at the time of an individual's death.

Query from TaxationWeb visitor ('parkend')

I would be grateful if someone could provide some information re IHT and business property assets.

This relates to my mothers estate which will exceed the nil rate band unless some of her assets are counted as business property assets to exclude them from the estate.

1) My understanding is that a business property asset has to be held for at least 2 out of the 5 years before death to be excluded from the estate. I also believe that one asset (e.g. shares) can be sold and replaced with another asset provided the new asset cost no more than the one which has been sold and under this condition the ownership periods can be added in terms of achieving the 2 years. Can someone confirm this is correct or is it more complicated than that?

2) The question I can’t seem to find any information on is what happens if a person dies within 3 years after an asset, which has been held for the 2 years, is sold and the proceeds held as cash at the time of death. Will the cash value realised on the sale be excluded from the estate?

Editor’s Comments

There is a general requirement that in order to qualify for BPR, the business property must be held for at least 2 years. However, an important relaxation in this 2 year ownership rule applies to replacement property. In broad terms, replacement property can qualify for BPR if it replaced other qualifying business property, and the total period of ownership for both qualifying business assets is at least 2 out of the last 5 years. BPR for the replacement asset in that case is generally limited to the BPR that would have been available in respect of the original asset (IHTA 1984, s 107).

Unfortunately, in the case of the query from 'parkend', the business property had not been replaced at the time of his mother's death. As mentioned in the responses below, cash does not normally qualify for BPR. As indicated by Simon Sweetman (see below), the business asset replacement requirement had not been satisfied at the time of the chargeable event in question, i.e. on death.

Forum responses included those reproduced below

Simon Sweetman commented:

Cash is not business property (unless perhaps the working capital of an actual business. Even if you sold the business the day before, what you have is not business property. What you need to look at first is the property comprised in the estate at death before thinking about replacements and the like.

'parkend' replied:

Thanks for the comment but not sure if I understand.

If someone owns AIM shares in company 'A' which are classed as business property and sells them with a view to buying at a later date (up to 3 years later)the same value of shares in Company 'B' which would also be a business property.

Am I right in thinking this is no problem unless you have the misfortune to die in the period after sale and before purchase?

I thought I had read somewhere that the money could be uninvested for 6 months without problem. But this does not seem to tie up with the 2 out of 3 years.

Any further guidance would be appreciated.

Simon Sweetman responded:

Yes, you can replace business property and the length of time covers both old and new, but if it is not business property at the time of death or disposition then there is no relief for it.

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Article Added Saturday, 12 April 2008 | 11942 Hits

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