Business Property Relief – When two years is too long

Family business owners will generally be familiar with the requirement that to obtain Business Property Relief ("BPR"), the business property must have been owned for a minimum of two years.

BPR is a valuable relief from inheritance tax and available at 100% on shares in an unquoted company, provided the activity of the business is predominantly trading rather than investment activity.

For most business owners, two years is not too long to wait, but it is useful to know that there are circumstances in which the relief can be obtained without having that wait. A case indicates that if there is a rights issue under which further shares are offered to all shareholders and the shareholder takes up his or her issue then, provided the allocation is linked and proportionate to shares already held by the shareholder, the new shares fall within the reorganisation of share capital rules and qualify immediately for full relief from BPR.

Vinton and another (Executors of Dugan-Chapman) v Revenue and Customs Commissioners involved a shareholder claiming BPR who had previously provided a loan of £300,000 to the company and then took up a rights issue, paying for it by capitalising the loan. Had the shareholder not taken up the rights issue, the £300,000 loan would have remained an asset in her estate which did not qualify for BPR and so been taxable at 40% on death. Consequently, taking up the rights issue against the loan potentially saved £120,000 inheritance tax.

It is important to note that the executors of the deceased shareholder’s estate in Vinton were not entitled to relief on other shares which she had acquired at the same time. The deceased had taken up other shares in the rights issue which had been renounced by another shareholder. They did not qualify for immediate BPR as the right to buy them did not arise as a result of her ownership of her existing shareholding. Furthermore, relief was not available on shares that the deceased had subscribed for in the normal way outside the rights issue. Both these classes of shares would have to have been held for two years to qualify in the usual way.

BPR is relevant, of course, not only on death but on any transfers of value that would otherwise be chargeable to inheritance tax, such as a gift into trust. Family business owners who are in a position where they have lent money to their company and are interested in obtaining inheritance tax relief on the value represented by the loan should bear this possibility in mind.