Business property relief (BPR) stops the tax man getting his hands on your firm after you’ve gone, says Tax Tips & Advice. But there are pitfalls that can restrict the tax break. Where BPR applies to shares you own in a trading company, these will be free of inheritance tax (IHT). Where “you personally own assets used in a company’s trade, for example the business premises, BPR can cut the IHT bill on these by 50%”.
But watch out for assets held in the firm’s name but not used for the trade – eg, cash that’s been sitting in a director’s loan account. This wouldn’t qualify for BPR and could be taxed at 40%.
Can you get around this? Say Bill and Ben own Acom, a firm valued at £1m on Bill’s death, £200,000 of which had been in the bank for some years. The loan account balances should have been converted into Acom shares two years ago to avoid BPR. But Bill and Ben could have made a ‘rights issue’ against their existing shares. As this counts as an extension to an existing shareholding (owned for well over two years) rather than new shares, they’d have qualified for BPR immediately.