View the related Tax Guidance about Business property relief (BPR)
Understanding BPR ― overview
Understanding BPR ― overviewThis guidance note provides an overview of the fundamentals of BPR and the scope of the information covered in the ‘Understanding BPR’ sub-topic.The fundamentals of BPRBPR is a valuable relief which reduces the value of a transfer of relevant business property on which IHT is charged by either 50% or 100%, depending on the nature of the property. There are conditions as to the type of property which qualifies, the activities that the property is used for, the minimum period of ownership and its status as an ongoing business at the date of the transfer. Each condition should be carefully considered. Where the property has been subject to a lifetime gift and the transferor dies within seven years then there are additional conditions that must be met. The purpose of BPR is to ensure that businesses will not have to be broken up on a death due to the need to pay IHT.BPR is also available for trustees who are subject to IHT on a 10–year charge or an exit charge.A key condition is that the business must not be one which is wholly or mainly the making or holding of investments, that is BPR is not available on a business which is an investment business rather than a trading business. This test is known as the ‘wholly or mainly’ test. Wholly or mainly is a 50% test.In this note and throughout the sub-topic, for ease of reference, ‘trading’ is used to mean a business that
An introduction to inheritance tax (IHT)
An introduction to inheritance tax (IHT)This guidance note provides a background to IHT and the basic principles.Background to inheritance taxInheritance tax is, essentially, a tax on gifts. This typically arises when a person dies and all the property that they own (their ‘estate’) passes to beneficiaries. An individual may also transfer their assets to others during lifetime. This could be an outright gift of assets to another person or a gift into trust.Assets in trust are held by trustees for the benefit of others, whose entitlement to them is restricted in some way. Special inheritance tax rules apply to trusts to reflect the separation of legal and beneficial ownership.IHT is a tax on the donor ― the person who is transferring the asset(s). It is calculated with reference to their estate. It is not a tax on the beneficiaries, though what the beneficiaries receive may be reduced by the amount of tax. This position contrasts with the law in certain other jurisdictions where ‘death duties’, gift tax or the equivalent are a tax on the people receiving the property and is taxed in accordance with their status or wealth. Clients who receive an inheritance often ask if they have to pay tax on it. Generally, the answer is ‘no’, because any tax due has fallen on those administering the estate or trust, and will have already been paid. However, this may not always be the case, as a lifetime gift may give rise to IHT if the donor dies
Transfer of assets to beneficiaries ― legal, administration and tax issues
Transfer of assets to beneficiaries ― legal, administration and tax issuesThis guidance note outlines how assets are transferred to beneficiaries and the tax consequences that flow from the transfer. Whether a payment is income or capital is discussed in the Payments to trust beneficiaries guidance note.This guidance note is designed to give outline and background for accountants and tax advisers who deal with clients establishing trusts. It is not targeted at lawyers.This guidance note deals with the position in England and Wales only. See Simon’s Taxes I5.8 for details of the provisions affecting Scotland and Northern Ireland.Three issues to consider when transferring assets to beneficiariesTrustees may decide to exercise their powers by appointing assets to a beneficiary. There are three key issues that need to be considered when making or considering such a transfer:•how they must document the exercise of their powers•the formalities that should be complied with to transfer the asset•the tax consequences of the transferDocumenting the exercise of the trustees’ powersThe deed may require the exercise of the trustees’ power to be documented by deed. If no deed is required then the trustees decision and actions can be recorded by a written resolution. However, it is important that the correct documentation is prepared. If an appointment requires a deed but is made without one then the appointment is void.A deed should be used where the trustees require an indemnity for tax or other expenses.Preparing deeds is a reserved legal service and is regulated by
Sale of shares from deceased estate
Sale of shares from deceased estateSale of shares relief ― principlesIf shares are sold in the year following death at an overall loss, relief may be available by substituting the sale price of the sold shares for their death values, thus generating a repayment of inheritance tax.The basic conditions for claiming the relief are summarised as follows. Each condition is discussed further below:•the shares sold must be ‘qualifying investments’•the sales must occur within 12 months of death•the shares must be sold by the ‘appropriate person’•there must be an ‘overall loss’ on the sales of the qualifying investmentsIHTA 1984, s 179(1)This relief does not apply to shares transferred in the deceased’s lifetime, but a separate relief may be available. See the Fall in value relief guidance note. Qualifying investmentsQualifying investments include:•quoted shares and securities (including those quoted on a recognised foreign stock exchange). The shares must be quoted at the date of death•unit trusts•open-ended investment
Expenses and liabilities
Expenses and liabilitiesGeneral principlesExpenses and liabilities may reduce the value of property to be charged to inheritance tax. This general principle arises from the ‘meaning of estate’ given in IHTA 1984, s 5 which includes the provision:“In determining the value of a person's estate at any time his liabilities at that time shall be taken into account, except as otherwise provided by this Act.”Transfers of value are quantified with reference to the amount by which a person’s estate has diminished. The transfer on death is equal to the value of the whole of a person’s estate immediately before his death. It follows that the value of transfers is reduced by the associated liabilities. When considering settled property, inheritance tax is charged with reference to the ‘value of the property or part at that time’. The value of any property for inheritance tax purposes is ‘market value’. The market value of assets is reduced by liabilities. The practical application of these general principles to the valuation of property for IHT means that, for example:•the value of a death estate is reduced by the deceased's outstanding personal debts such as household bills and credit cards•the value of a gift (eg a house) is reduced by liabilities attached to it (eg a mortgage)•the value of settled property is reduced by the trustee's outstanding debts such as professional feesSee Example 1, which also illustrates some of the principles described below.Specific provisionsThe general principles are qualified and expanded by a number
Woodlands
WoodlandsWoodlands may attract one of three different types of relief from inheritance tax (IHT) depending on the nature of the land and timber operations. These are:•agricultural property relief (APR) covered in the Agricultural property relief (APR) guidance note•business property relief (BPR) covered in the BPR overview guidance note•or woodlands reliefThis note concentrates on woodlands relief but APR and BPR are also considered briefly below.Woodlands may obtain APR if they are occupied with agricultural land or pasture and their occupation is ancillary to that of the agricultural land or pasture. An example is a strip of woodland acting as a wind shelter for farmland. Alternatively, woodlands may qualify for BPR if they are run as a commercial business (eg orchards or nurseries) or otherwise generate business profits by regularly producing timber.APR and BPR are usually to be preferred to woodlands relief. This is because, effectively, APR and BPR provide the equivalent of an exemption from IHT (at 50% or 100% of the relevant value of the property) whereas woodlands relief only defers IHT. Moreover, woodlands relief only defers the IHT on the timber, not on the underlying land. However, there will be occasions when woodlands are either not associated with agricultural property or are not part of commercial operations (eg where held as part of a private estate or as an investment) and so woodlands relief needs to be considered.The remainder of this note concentrates on woodlands relief.Outline of woodlands reliefIt is only possible to claim this
Property investment or trading?
Property investment or trading?Outline of property investment vs tradingThis guidance note applies to both individuals and companies.The distinction between income and capital profits is crucial to many areas of tax law and is a common issue for property transactions. Often it will be quite clear cut as to whether the activity is trading or investing in land. A person buying property to let out long term will be making a property investment, whereas someone buying a property to refurbish and sell (’flipping’) will most likely be trading as a property dealer or property developer. However, where is the line to be drawn between activity regarded as dealing and activity regarded as investment?First, it is important to realise that the tests for whether one is dealing in property or making a property investment are the same as for any other trade. Therefore, a good place to start is to look at the ‘badges of trade’ and considerations will include:•profit seeking motive•frequency and number of similar transactions•modification of the asset in order to make it more saleable•nature of the asset•connection with an existing trade•financing arrangements•length of ownership•the existence of a sales organisation•the reason for the acquisition or saleThe badges of trade are not a statutory concept but are a recognised set of criteria developed by the courts to identify when a person is undertaking a trading activity. They can be applied to property transactions just as they can to a variety of
Demergers ― overview
Demergers ― overviewThis guidance note gives an overview of why and how companies and groups demerge, and the aims and process of tax planning for demergers.In simple terms, a demerger involves the separation of a company’s business into two or more parts, typically carried on by successor companies under the same ownership as the original company.Companies (and groups) may want to split out their activities for many different reasons. There may be a desire to focus management on one specific part of the business or there may be conflicting interests between shareholders. There could also be legal reasons to separate a trade out from the rest of the group (eg to ring fence liabilities). It may be the only way for a purchaser to be able to buy certain parts of the business. While demergers are usually triggered by a variety of commercial reasons, a business undergoing a demerger will also want to minimise, and ideally eliminate, any tax charges arising on the demerger.The different mechanisms for achieving a tax efficient demerger fall into three main categories:•statutory demerger•demerger by way of reduction of share capital (often referred to as a capital reduction demerger)•demerger by Insolvency Act 1986, s 110 demerger (also known as a liquidation demerger)For each of these demergers there are tax provisions which should mean that, for tax purposes, a qualifying distribution is exempt and as such there is no income tax for the shareholder.The decision as to which demerger mechanism to use will
Agricultural buildings
Agricultural buildingsThis guidance note summarises the treatment of agricultural buildings in farms including what capital allowances can be claimed, the assessment of farm buildings which are let out, repairs and renewals and the possible effect of having redundant farm buildings on tax reliefs.More details of the IHT position of specific buildings can be found in the following guidance notes:•Agricultural tenancies•APR and the farmhouse•APR and farmworkers' cottages•Agricultural value and development valueDefinition of plant not buildingA large amount of expenditure in relation to a modern building relates to items of plant and machinery. The farmer or landowner may identify such expenditure and claim the appropriate capital allowances and annual investment allowance (AIA) in accordance with the rates available. These are generous with the AIA limit at £1,000,000. All appropriate conditions must be met. See the Annual investment allowance (AIA) guidance note for more information.The ability to claim AIA on plant applies as much to a second-hand building as a new one. It can be quite normal practice for farmers to buy second-hand barns. The apportionment between the categories depends on the valuation techniques and requires knowledge of building construction.The ‘after-tax’ cost of funding a new diversified venture will be affected by whether expenditure is treated as buildings or plant. There may well be borderline cases where planned expenditure could be regarded as plant. However, there are certain items of expenditure where the legislation is clear as to what it deems to be plant alterations to buildings incidental
Advising farmers ― overview
Advising farmers ― overviewThis guidance note summarises the main areas of tax which impact on farmers and market gardeners together with links to relevant articles relating to farming. What is farming and market gardening for tax purposes?‘Farming’ means the occupation of land wholly or mainly for the purposes of husbandry but does not include market gardening. Market gardening is defined as ‘the occupation of land as a garden or nursery for the purpose of growing produce for sale’. It is important to understand the exact detail of the activity in terms of the specific land use and the whole farming enterprise. Further details on the definition of farming can be found in the Definition of farming trade guidance note.The distinction between farming as a hobby and farming commercially is also important and farming has its own set of hobby farming rules which restrict loss relief when farming is not done on a commercial basis. More details of the rules are set out in the Farming ― restriction of losses for hobby farming guidance note.More details commentary can be found in Simon’s Taxes B5.101 onwards.Calculation of profits for farming and market gardeningThere are specific tax rules which relate to the calculation of profits or losses for farming or market gardening businesses due to the seasonal nature of the trades, see the Farming income and expenses guidance note. One of the main tax rules which apply to farmers is the averaging of profits which aims to even out fluctuations in
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