Give away business assets IHT free

If you give away business assets to your family, tricky inheritance tax rules could land your estate with an unexpected bill from HMRC. What steps can you take to avoid this happening?

Background

Relief from inheritance tax (IHT) can be claimed on the value of the business assets in someone’s estate. It is known as business property relief (BPR) and will reduce IHT payable on the value of a business by either 50% or 100% depending on the type of business assets involved.

Court case facts

In 2009 the High Court made an important decision regarding BPR in the case of HMRC v Trustees of Nelson Dance Family (TNDF). Nelson Dance (ND) was a farmer, and in 2002 he transferred (by way of a gift) the ownership of some of his farmland and buildings into a trust for his family. ND died two years later on 1 April 2004. As his death was within seven years of making the gift, it remained part of his estate for IHT purposes.

What happened next?

HMRC demanded IHT on the value of the land and buildings given away by ND, because in its view they did not qualify for 100% BPR. It said that the assets were “used in the business” but were not actually “a business in their own right”. And according to the Taxman, the law says that 100% BPR only applies to businesses as a whole and not the individual assets that it consists of. This may seem like nitpicking, but the tax involved could be huge. For example, if the business assets given away were valued at, say, £300,000, the IHT involved could be up to £120,000. But if 100% BPR applied, the tax could be reduced to nothing.

Right or wrong

The judge in this case agreed with the Special Commissioner, who had considered the question before it went to court, and decided that 100% BPR was due. So the IHT bill was reduced to nil.What makes the case of TNDF important is that most tax experts would probably have agreed with HMRC. This means the decision by the judge marks a significant change when it comes to IHT planning.

Planning

The result in TNDF means assets merely used in a business can qualify for 100% BPR, and so can be given away and escape IHT entirely. It’s no longer necessary to give away part of the business itself. You can therefore give away value from your business while keeping full control. For example, if you own the premises (not through a company) that your business operates from, you could transfer it into a discretionary trust for your children and there would be no IHT.

A word of caution

The judgment in the TNDF case won’t apply in all situations and it’s a good idea to take advice from a tax expert before making a transfer of business assets.

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Give away business assets IHT free

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