Relief for Business assets – is change around the corner?

28 / 12 / 2018

Inheritance tax (“IHT”) is set to change. Earlier this year, Philip Hammond commissioned a review by the Office of Tax Simplification into three aspects of Britain’s so-called “most hated” tax, namely: the filing process, the effect on taxpayers’ investment decisions, and the complexity of the system. This last category has led some to believe that any simplification will focus on current reliefs; restricting reliefs being more politically expedient than a rate increase. One such relief, Business Property Relief, has been at the centre of speculation since the consultation was published in April.

Where are we now?
Currently, Business Property Relief fully exempts
from IHT:

  • businesses or interests in business such as partnership stakes; and
  • unquoted shares, notably shares listed on the Alternative Investment Market (AIM).

A 50% reduction is available for:

  • quoted shares that give the taxpayer control of the company; and
  • personal assets, such as land or machinery, used for a business that the taxpayer controls.

Generally, the assets must have been held for at least two years to qualify.

These reductions apply not only to the 40% IHT charge on death, but also to the 20% entry charge and ongoing charges that can apply to some trusts.

What could change?
Some commentators have speculated that Business Property Relief could be restricted. Possible measures include removing AIM shares from the relief entirely, or increasing the requisite holding period. The Office of Tax Simplification has requested feedback as to the merits of a limit on the value of qualifying interests, as well as the introduction of post-death holding periods, which would suggest that these areas have attracted at least initial consideration.

What can I do to protect my assets?
One solution for those considering passing qualifying business assets down to the next generation is to create a lifetime trust before any reforms are enacted, as this would “bank” the relief while it still exists. Discretionary trusts provide the greatest degree of flexibility and asset protection for potential beneficiaries, such as on divorce or bankruptcy.

Any decision should be undertaken with the help of a legal adviser, bearing in mind one’s financial and personal circumstances. Please do get in touch if you would like further information.