Understanding Business Relief (BR)
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only. You should always seek professional advice from an appropriately qualified adviser.
All contents are based on our understanding of current legislation, which is subject to change, any information provided here is only correct at the time of posting.
The Financial Conduct Authority do not regulate will writing, loans, credit cards or some forms of mortgage, tax advice, offshore investments and estate planning.
There is a risk to your capital and you may not get back the full amount invested. The value of investments, as well as the income from them, can fall as well as rise.
Business Relief (BR) is designed to encourage investment in businesses by reducing the value of certain business assets when calculating their value for the purposes of assessing Inheritance Tax on an individual’s estate. Introduced in 1976, BR can reduce the taxable value of qualifying business assets by either 50% or 100%, depending on the type of asset.
What Can Qualify for Business Relief?
To qualify for BR, the assets must be held for a minimum of two years prior to the owner's death. Qualifying assets can include:
· Shares in an unlisted company, including those listed on the Alternative Investment Market (AIM).
· Ownership interests in a business, such as a sole proprietorship or partnership.
· Certain assets used in the business, such as machinery or buildings.
Example: Selling a Qualifying Business and IHT Implications
Consider Jane, aged 67, a successful female business owner, who decides to sell her qualifying business for £2,000,000. Prior to the sale, Jane’s business would potentially qualify for 100% BR, meaning the business value would not be subject to IHT upon her death.
Post-Sale IHT Scenario
Depending on factors such as her other personal wealth and her marital status, the £2,000,000 proceeds from the sale would become part of Jane’s estate and may be subject to IHT at 40%, resulting in a potential tax liability of £800,000. This significantly reduces the wealth Jane intended to pass on to her beneficiaries.
If Jane were to reinvest the proceeds into other BR-qualifying assets, such as shares in unlisted companies or those listed on AIM, she could potentially maintain Business Relief on the reinvested amount subject to certain time constraints and her continuing to hold these assets on her death.
Advantages of Investing in BR-Qualifying Assets
1. IHT Efficiency: Ability to potentially reduce an IHT liability. By holding BR-qualifying assets, individuals can potentially pass on more wealth to their beneficiaries.
2. Encouraging Investment in SMEs: BR incentivises investment in small and medium-sized enterprises (SMEs), fostering economic growth and innovation within the UK.
3. Flexibility in Estate Planning: BR-qualifying investments provide an opportunity for strategic estate planning while the individual retains access to the capital to support them financially. This can differ from other forms of IHT-planning such as the use of trust where the individual may have to forgive access to the capital in the future.
4. Two year holding period: Once the investment is held for a minimum of two years, it may qualify for BR relief if the investment is held on death. This can be advantageous to those who may not wish to be subject to 7-year-rule on conventional gifting/trust planning
Disadvantages of Investing in BR-Qualifying Assets
1. Liquidity Risk: BR-qualifying investments, such as shares in unlisted companies, are often less liquid than publicly traded shares. This means they may be harder to sell quickly or at their market value.
2. Higher Risk: Investing in smaller, unlisted companies typically involves higher risk compared to more established, publicly traded companies. These businesses can be more volatile and have a higher failure rate.
3. Complexity and Management: Managing BR-qualifying assets can be more complex and time-consuming. Investors need to stay informed about the qualifying status of their investments and the performance of the underlying businesses.
Conclusion
Business Relief (BR) is a powerful tool for mitigating inheritance tax (IHT) in the UK, offering significant advantages to business owners and investors. By understanding the qualifying criteria and strategic reinvestment options, individuals can effectively manage their estate planning and potentially reduce their IHT liability.
For business owners like Jane, selling a qualifying business and reinvesting in BR-qualifying assets can help preserve wealth for future generations. However, it is crucial to weigh the benefits against the risks, such as liquidity and investment volatility. Engaging with a suitably qualified financial adviser can provide tailored advice and ensure that investments align with overall estate planning goals.
Investing in BR assets requires careful consideration and a thorough understanding of the associated risks and rewards. With the right strategy, it can be a valuable component of a comprehensive estate planning approach, helping to secure financial legacies and support economic growth within the UK.