What is Business Relief (BR) ?
BR IHT risk warnings
Individuals should always read and bear in mind the risk warning notices that are included within providers’ investment offer literature/documentation, including prospectuses, information memorandums, securities notes, brochures and other related marketing literature. Whilst the following list is inconclusive, some of the main risks to be aware of include:
Specifically in relation to this structure you should also note
- Investments may be made in small, unquoted companies and/or partnerships, and should be considered as high risk and as such investors should be aware that their capital is at risk
- Investments are illiquid
- An BR IHT investment should be viewed as a long-term investment
- Legislation, along with the nature and level of tax reliefs is subject to change. There can be no certainty that investments will be eligible or remain eligible for Business Relief and the benefit of of any possible relief can vary depending on individual investors circumstances
- Historic investment performance cannot be used as a guide to future performance, and the value of any given investment may rise or fall
- Investment strategies used by individual managers may differ. Individuals should understand the nature and inherent risks of the product/service for which they are considering a subscription
- BR IHT insurance options may have exclusions and termination/renewal dates
- BR IHT investments should only be considered by sophisticated investors who understand, and have given careful consideration to, the underlying investment strategy and associated risks. For help in determining potential investment suitability, professional advice should be sought
- Specifically in relation to this structure you should also note
- Neither the Companies nor any of the service providers are subject to regulatory oversight as would often be the case with tax sheltered products
- There is a lack of independent oversight of the consultants with the interests of investors not well represented on the Board
- Realisations and distributions are dependent on a secondary market of willing buyers developing and/or the Company being willing and able to buy back its own shares
Business Relief (formally known as Business Property Relief) is a form of tax relief that can provide an investor with relief in respect of Inheritance Tax (IHT) that would otherwise normally apply to the transfer of business assets. Various Business Relief solutions are offered and due to their IHT ramifications, they are important when considering IHT tax planning strategies.
Business Property Relief, now known as Business Relief (BR) was introduced by the 1976 Finance Act, with the aim of promoting investments in unquoted businesses by allowing a family-owned company to be bequeathed free of inheritance tax (IHT) implications. Individuals can therefore claim business relief on transfers of certain types of business and business assets (including shares in unquoted trading companies and AIM-listed companies) if they qualify as a relevant business property and the transferor has owned them for a minimum period. BR can be claimed for transfers made during a person’s lifetime or upon their death.
Type of IHT business relief solutions
A number of asset managers participating in the tax efficient market have set up solutions for investors seeking to shelter their assets from IHT. These solutions have varying degrees of associated risks, features and benefits and can be categorised as follows:
The EIS was designed to encourage investments in UK’s enterprise market (i.e. companies with gross assets of less than £15 million). After two years of an investor holding them, the shares in EIS qualifying companies will generally qualify for IHT relief purposes at rates of up to 100%, so that any liability for IHT is reduced or eliminated in respect of such shares. This makes EIS solutions useful for IHT planning. However it should be noted that EIS solutions are not generally aiming to obtain IHT relief only; investors should ensure the investment meets their IHT planning needs. Please see here for more information on EIS investments.
One method of obtaining BR is through a portfolio of diversified holdings known as an AIM portfolio. This service provides investors with a portfolio of qualifying AIM stocks to be held long-term, under a discretionary management contract with an asset manager. In addition to the IHT relief, an AIM portfolio provides potential capital growth as well as dividend income for the investors. In order to qualify for BR, the portfolio must be held for two years and the underlying companies must be deemed to be eligible for BR (see later).
This is a relatively new type of BR vehicle which provides investors with what is considered to be low risk trades operating within special purpose vehicles (SPVs), created explicitly to run BR qualifying businesses (see below). This service operates on behalf of private clients and aims to buy unquoted shares in SPVs that it expects to qualify for BR in the event of the investor’s death.
Business Relief Tax Relief
- The business or company must have been held by the transferor for at least two years
- The business itself must meet certain trading criteria such as unquoted shares which are not listed on a recognised stock exchange. For more details, please see http://www.hmrc.gov.uk/cto/customerguide/page16.htm
- Engaged wholly or mainly in dealing in securities, stocks or shares; dealing in land or buildings; or making or holding of investments. For example: residential/commercial property letting or dealing; serviced offices etc.;
- Not carried on for gain, i.e. not trading on a commercial basis for profit;
- Subject to a contract for sale or being wound up, unless that sale is to a company which will carry on the business, and the sale is made wholly or mainly in consideration of shares in the company buying the business.
- Not used wholly or mainly for the purposes of the business throughout the two years immediately before the transfer (or since its acquisition by the business if that is more recent). This would exclude, for example, the value of surplus cash held by the company.
- Not required at the time of the transfer for identified future use for the purpose of the business, or
- Used wholly or mainly for the personal benefit of the transferor, or a person connected with the transferor (e.g. the spouse, a child or other relative of the transferor).
It is very important to note that the IHT relief is not guaranteed. It is only when the investor dies that HMRC rule as to whether an asset qualifies for BR or not. Once HMRC has assessed an application for BR, investments that qualify for BR (assuming they have been held for at least two years) can be passed to the deceased’s beneficiaries free of IHT.
As businesses change and evolve over time it is important to continuously review whether the business or company continues to meet all of the qualifying criteria. If BR is denied or restricted, an IHT charge of 40% on death will normally arise on the relevant value of the shareholding (subject to limited exceptions, for example, the spouse/civil partner exemption or nil rate band is available to shelter the IHT liability).
Summary of Tax Benefits
|Tax Efficient Comparison Table||EIS||SEIS||BR IHT||VCT|
|Current Investment Limits||£1 million (A)||£100,000 (D)||No limit||£200,000|
|Income Tax Relief||30%||50%||n/a||30%|
|Min Holding Period||2 years for IHT 3 years for EIS||2 years for IHT 3 years for SEIS||2 years||5 years|
|Tax Free Dividends||No||No||No||Yes|
|Tax Free Exit||Yes/No (C)||Yes after 3 years||Yes, after 2 years||Yes (G)|
|Capital Gains Deferral||Up to 28% (B)||n/a||n/a||Nil|
|Capital Gains Re-investment Relief||n/a||Effective relief up to 14% (E)||n/a||Nil|
|Inheritance Tax Free||Yes after 2 years||Yes after 2 years||Yes after 2 years||No|
|Carry Back Facility||Yes||Yes||N/A||No|
|Business Relief||100% after 2 years||100% after 2 years||100% or 50% after 2 years (F)||No|
(A) Up to £1M of EIS investment may be carried back to the previous tax year if the limit for that year was not fully utilised.
(B) Gains arising in current tax year to higher rate UK tax payers are chargeable at 28%. The relief is a deferral only, and not an exemption and the deferred gain will crystallise on sale of the EIS shares.
(C) There is no tax free exit for shares for which EIS deferral relief only was claimed.
(D) Up to £100,000 of SEIS investment may be carried back to the previous tax year if the limit for the year was not fully utilised.
(E) SEIS reinvestment relief exempts half of the gain reinvested up to the SEIS maximum investment of £100,000 ie for a gain of £100,000 reinvested in an SEIS investment, 50,000 of the reinvested gain is exempt
(F)A business or an interest in a business – 100%
Unquoted securities which on their own or combined with other unquoted shares or securities give control of an unquoted company – 100%
Unquoted shares – 100%
Quoted shares which give control of the company – 50%
Land or buildings, machinery or plant used wholly or mainly for the purposes of the business carried on by a company or partnership – 50%
Land or buildings, machinery or plant available under a life interest and used in a business carried on by the individual – 50%
(G) If disposal relief is due, you will not have to pay Capital Gains Tax on any gain you make on the disposal of VCT shares.https://www.gov.uk/government/uploads/system/uploads/attatchment_data/fi…