Here are some of the most common issues that we see regarding business property relief and owner manager businesses:
Shareholder protection plans
It is common for shareholders and business partners to take out some form of life insurance to enable their share of the business to be bought back from their estate on death. This is often essential to secure the future of the business.
As part of these arrangements it is common for the parties to enter into an option agreement to ensure that their business interest will be sold by their estate. Certain types of option create a binding agreement to sell on death and as such will prevent a claim for business property relief being made.
Our advice – review all such arrangements – these can often easily be restructured to ensure that they do not create an issue with business property relief.
Personal borrowing to finance the business
It is generally possible to deduct outstanding loans from the value of your estate for inheritance tax purposes thereby reducing the amount of tax payable.
It is common for business owners to raise business finance personally secured on their home or other personal investment assets, then to loan this on to the business. This arrangement used to be IHT efficient as the value of the loan reduced the value of the home for IHT purposes.
From July 2013 the rules were changed and as a result the liability is detached from the home and set against the value of the business if this will qualify for business property relief.
The good news is that the new rules will only apply to loans taken out post 6 April 2013. The bad news is that any changes made to existing loans could change their status.
Our advice – review all of your loan arrangements to ensure that these remain IHT efficient.
Business finance – family members
We often see cases where the business needs to raise cash and a member of the family has the surplus cash to lend.
Business property relief will not apply to a simple debt. Loan notes can attract business property relief but only where the loan notes and the ordinary shares held give the lender control of the company, control being 51% or more of the voting rights.
Our advice – consider issuing preference shares instead of loan notes. These can be redeemed in a tax efficient manner similar to a straight forward loan and once they have been held for two years will qualify for business property relief.