Business Owners will most likely be aware of the important Inheritance Tax (“IHT”) relief currently available on the value of their businesses. Business Relief (“BR”) can relieve the full value of the business and it has long been recognised that the policy objective behind the relief is to prevent the breaking up or sale of businesses on death. Whilst this may be hugely advantageous for all businesses, the benefit is perhaps most keenly felt by family businesses where the legacy is as much about heritage and history as it is about a continuing trade.
Broadly, BR is available at the rate of 100% on the value of trading as opposed to investment businesses, provided that certain conditions, such as a two year ownership requirement, are satisfied. Somewhat unhelpfully there is no legislative definition of a trading business, however any business which does not consist wholly or mainly of dealing in securities, stocks or shares, land or buildings or making or holding investments will qualify.
Following a consultation process, the Office for Tax Simplification (“OTS”) published an initial report in November 2018 setting out their views on various issues and complexities associated with the current IHT system. Amongst the issues raised was BR and the lack of clarity and consistency with which the rules are applied. Concerns were also raised in relation to whether the availability of the reliefs led taxpayers to hold on to businesses until death rather than transferring them to the next generation during lifetime. Evidence from the consultation suggested that the reliefs were generally operated in a straightforward way with only a few specific areas requiring simplification.
It is perhaps surprising then that a follow up report from the OTS on IHT reform, published in July 2019, went on to explore the possibility of complete withdrawal of BR. This would mean that the full value of the deceased’s interest in the trading business on death, intended to be passed down the family line after years of hard work, could be exposed to IHT. This has been tempered with the suggestion that this significant change may be coupled with a global reduction in the rate of IHT. The extent however to which the rate could be reduced is unclear, as is the impact on the family and their ability to continue to run the business after funding the tax liability.
Even if the relief is not removed entirely, the OTS has recommended aligning the accepted definition of what constitutes trading as opposed to investment between the different taxes. At the moment, a business is regarded as “wholly or mainly trading” for IHT (and therefore BR) purposes based on a 50% test. The Capital Gains Tax (“CGT”) equivalent “substantial” trading test is a more restrictive 80:20. Whilst the OTS could of course have suggested upwards alignment of the CGT test, the recommendation instead is that the appropriate test for IHT is lowered. Many businesses which have in recent years diversified their activities, for example to include the letting of commercial property, being careful to remain on the right side of the 50% BR test, may soon find themselves on the opposite side of this line.
The recent 2021 Spring Budget offered up no real commentary on IHT other than a freeze of the tax-free Nil Rate Band threshold, which was due to increase from 5 April 2021 by inflation but will now remain at £325k per person, as it has been since 2009. There followed speculation that the Chancellor’s inaugural “Tax Day” on 23rd March might provide an update on the on going IHT consultation but again very little was mentioned.
It therefore still remains to be seen whether any of the proposals made by the OTS on the future of BR will be implemented. What is clear however is that business owners and their families should be mindful of the suggestions and how they might impact upon the succession and taxability of their estates going forward.
If you would like any assistance on analysing, implementing or reviewing any existing incentive schemes, please get in touch with Lisa Tait, Private Client Tax Senior Manager at Anderson Anderson & Brown LLP.
Find out more about AAB’s Family Business Team here.