IHT Business Relief changes could impact business legacy

This would be a drastic move from the current system and the Government will need to consider how they balance the need for increased tax revenue with the importance of supporting business continuity and growth.

What is Business Relief

Business Property Relief, or Business Relief as it is often known, reduces the value of a business for IHT purposes. It is available on the transfer of business assets during an individual's lifetime or on death.  To qualify, the relevant business assets must be owned for two years before transfer in most circumstances.

Business Relief was first introduced in the 1970s to protect the legacy of privately owned businesses meeting certain conditions, allowing them to operate following the death of an owner, where otherwise the businesses may need to be broken up or sold to pay the IHT liability.

Business Relief is also available for those who invest in qualifying businesses through share ownership. This has been very attractive from an IHT planning perspective as it reduces the amount subject to 40% IHT in an individual’s estate if held for two years as opposed to the seven-year rule which applies to gifts.

Those investing can also retain access to the investments and any dividend income stream, meaning an individual maintains control and access whilst benefiting from an IHT-friendly environment.

The relief is excluded for certain businesses that wholly or mainly consist of dealing in stock or securities, land or buildings or making or holding investments (other than in companies which themselves qualify for relief).

Current Business Relief rules

You may qualify for 100% Business Relief on

• Shares you own in a qualifying trading business, for example, your unquoted family company.
• Shares you own in other trading companies, which might be investments. This includes companies listed on the Alternative Investment Market.
• EIS and SEIS shares.

You may receive 50% Business Relief on

• Shares you own in a quoted company, if you have more than 50% of the voting rights
• Your land, buildings or machinery if they are used wholly or mainly for the business

Business Relief exemptions

• Business Relief will not apply if your shares are in a business that deals in securities, stocks and shares, land or buildings, or making or holding investments, including shares are not exempt from business relief.
• This particularly impacts you if you are a landlord with a rental property or have shares in a property rental company.

Possible changes to Business Relief in the Autumn Budget

Following a report published by the Institute for Fiscal Studies (IFS) which looked at how the Government could raise revenue by closing IHT loopholes there have been suggestions that the availability of Business Reliefs and Agricultural Relief (which is similar to Business Relief) could be significantly reduced or even abolished in the coming Budget.

Abolition would be a significant move from the Government and could have a catastrophic impact on business owners, the most damaging being the possibility that business assets may need to be sold to fund the tax bill, going against the original policy for the relief.

Other suggestions include capping Business Relief at the value of £500,000 per individual. Although better than complete abolition of the relief, the impact on privately owned businesses could still be significant.

We would expect that if there were to be changes to Business Relief there would be a consultation period before anything was announced and implemented.

Another area the Government may look to tighten is the criteria for assets ‘qualifying’ for Business Relief purposes, expanding the activities excluded from relief, or limiting the range of assets within the business that qualify.  This may result in new issues to consider when separating trading activities and what could be considered ‘investment assets’ into different entities in order to protect entitlement to the relief. 

Get in touch

If you have any concerns regarding possible changes to Business Relief or would like to look at protecting your business legacy, please do not hesitate to get in touch.

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