One of the reasons I find tax law interesting is because in crafting the legislation, frequently those who design it identify areas where a carve out from the general rule is desirable. An example is in Inheritance Tax (‘IHT’) where to date if someone dies or makes a lifetime gift and their estate/the gift comprises of shares in an unquoted trading company or business, that asset (as a general rule) passes because of IHT business property relief (‘BPR’) at a zero percent charge to IHT.
If a lifetime gift and the donor dies within 7 years, two conditions need to be satisfied being:
- The original property gifted has been owned by the gift recipient throughout, between the date of transfer and the donor’s death (or earlier the death of the gift recipient); and
- The original property (or in certain cases replacement property) still is ‘relevant business property’ meaning it qualifies for 0% IHT treatment because of the BPR rules.
There are similar rules for qualifying agricultural assets.
The logic for this relief is because it would disadvantage UK plc if e.g., X, the sole owner of a trading business worth say £4m, died and their estate was within IHT and £1.6m of tax was due on their trading business asset.
In September 2023 the Institute of Fiscal Studies issued its Green Budget. Chapter 7 is entitled ‘Reforming IHT’. Its recommendations as regards IHT BPR say as follows:
5. There are several problems with the current design of inheritance taxation. Reliefs for agricultural and business assets and certain classes of share open up channels to avoid the tax and are consequently costly and inequitable and distort economic decisions. There is a clear case for eliminating the special treatment of all of these types of assets.
6. Abolishing agricultural and business reliefs could raise up to around £1.5 billion a year. How much revenue would be raised is uncertain and depends on various factors including whether other channels are used to avoid inheritance tax. Making these changes together would reduce the scope for substituting one avoidance channel for another.
7. Four-fifths of the tax revenue from reform to business relief could be captured just by capping the relief at £500,000 per person, rather than outright abolition. Most business wealth is concentrated among those with high wealth, so the fiscal cost of an additional half a million pounds threshold for business wealth would be low, though the special treatment would remain unfair and distortionary.Around 90% of business wealth bequeathed is given as part of an estate worth over £2 million.
The present IHT BPR regime has no cap on the value of qualifying assets on death or in lifetime that can pass at a 0% rate of IHT. The shelf-life of this present generous regime is unknown and therefore owners of qualifying trading assets may want to consider passing on e.g., to children or a family discretionary trust qualifying assets especially if the intention is for the business/trading operation to continue well into the future.
The main IHT anti-avoidance rule concerning gifts with reservation of benefit needs to be kept in mind by the donor. In its IHT tax manual HMRC says in the context of lifetime gifts of qualifying IHT BPR assets: ‘The continuation of existing reasonable commercial arrangements in the form of remuneration and other benefits for the donor’s services in a business entered into before the gift does not amount to a reservation provided the benefits are in no way linked to, or affected by, the gift.
What is ‘reasonable’ will depend on all the facts but, broadly, HMRC should test this by reference to what might reasonably be expected under arm’s length arrangements between unconnected parties.
If, however, as part of the overall transaction, including the gift, new remunerative arrangements are made, HMRC will need to examine all the facts to determine whether the new package amounts to a reservation ‘by contract or otherwise’.
In other words, the donor can continue to work in the business and be paid on an arm’s length basis.
Capital Gains Tax (‘CGT’) and ‘qualifying gifts’
The CGT legislation contains reliefs for gifts of business assets by allowing the gift recipient to assume the CGT base cost of the donor. This relief is called ‘hold-over’ relief. To qualify the asset gifted must fall within one of the following categories:
- Is, or is an interest in, an asset used for the purposes of a trade, profession or vocation carried on by:The donor, or Their personal company or A member of a trading group of which the holding company is the donor’s personal company; and/or
- Consist of shares or securities of a trading company, or of the holding company of a trading group, where: The shares or securities are not listed on a recognised stock exchange, or The trading company or holding company is the donor’s personal company.
A ‘personal company’ means a company in respect of which the donor can exercise at least 5% of the voting rights.
There is no knowing if a future administration might seek to amend the present IHT BPR rules. Should it want to, the IFS Green Budget gives it some cover. There is no guarantee that any future changes in IHT BPR rules will be avoided by making e.g. lifetime gifts now. What is I think non-contentious is that as a general rule, the UK does not make its changes in tax law retrospective.
Should you want to discuss anything raised in this note with someone from Streathers, please contact Robert Schon. Direct dial is 020 7267 5010 and email is rschon@streathers.co.uk
ROBERT SCHON PLANNING AND TAX ADVICE 