In last month’s Tax Insider, I wrote about the new “clearance” service for businesses. This service offers the taxpayer the opportunity to describe a proposed deal to HMRC in advance, and to get confirmation on how it will be treated for tax purposes.
This can be very useful, because in many cases the tax treatment of a complex transaction may be a “grey area” and it is not always possible to offer certainty to a client as to how tax will be charged.
By disclosing the whole thing to HMRC in advance (and it is important that the disclosure is full and honest), that certainty can be obtained.
At the time I wrote the article, the service was restricted to business tax only, and did not apply to personal tax issues. Now, one month later, HMRC has announced that the clearance service will be extended, initially for a trial period ending on 31 October 2008, to a very important aspect of personal tax – Business Property Relief from Inheritance Tax.
When you die, and in certain circumstances when you make a gift during your lifetime, Inheritance Tax (IHT) may be payable. In the case of death, IHT is payable at 40% on the value of your estate, plus any gifts made in the previous seven years, and minus the “nil rate band” which is currently £312,000.
“Business Property Relief” (BPR) applies to certain types of business asset, and reduces their value for IHT purposes by either 100% or 50%. The 100% reduction applies to:
An “interest in a business” – such as a partnership
Shares in a trading company which is not listed on a Stock Exchange
And the 50% relief, broadly, applies to assets (such as a buildings, for example) which are owned personally but used for the trade of one of the above.
BPR, therefore, can effectively make much of a person’s wealth exempt from IHT.
As you would expect, there are restrictions on how it applies, and the most important ones are:
A business which involves making or holding “investments”
A business of “dealing in land”
If a company exists simply to invest in the Stock Market, then its shares obviously do not qualify for BPR, but there are plenty of grey areas for most companies. The legislation refers to a company whose business is “wholly or mainly” investments, and in the case of a company that is basically trading but also lets out some of its premises to another company, or a business that involves an element of rental income such as a caravan holiday park, controversy rages between tax advisers and HMRC as to exactly where the line is drawn.
Dealing in Land
Once again, the extreme case is easy to spot, but what about a company that buys properties, renovates them, and then sells them? Are they “dealing in land” (no BPR) or are they a “property developer” (100% BPR)?
The newly announced clearance service will enable anyone contemplating a “transaction” such as a gift of shares in the family company, to apply in advance for confirmation from HMRC as to whether they consider that BPR would apply.
There is quite a complex procedure for obtaining the clearance, and it is essential to take professional advice on the application, but the proposed service looks as if it will provide a valuable degree of certainty about whether this important relief will apply to what, for many people, is their most valuable asset – their business.
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