A recent tax case has challenged the Taxman’s view that 100% Inheritance Tax relief is not due on ‘property owned by a business’, but only on the business itself. What does he mean by this? And is he correct?

 

Background

 

Relief from Inheritance Tax (IHT) can be claimed on the value of the business assets in someone’s estate. It is known as business property relief (BPR) and will reduce IHT payable on the value of a business by either 50% or 100% depending on the type of business assets involved.

 

A recent case – the facts

 

In January this year the High Court made an important decision on BPR in the case of HMRC v Trustees of Nelson Dance Family (TNDF). Nelson Dance (ND) was a farmer, and in 2002 he transferred (by way of a gift) the ownership of some of his farmland and buildings into a trust for his family. ND died two years later on April 1 2004. as his death was within seven years of making the gift, it remained part of his estate for IHT purposes.

 

What happened next?

 

The Taxman demanded IHT on the value of the land and buildings given away by ND, as they did not qualify for 100% BPR. His view was that the assets were’ used in the business’ but were not actually ‘a business in their own right’. And according to the Taxman, the law says that 100% BPR only applies to businesses as a whole and not the individual assets that it consists of. This may seem like nitpicking, but the tax involed could be huse. For example, if the business assets given away were valued at, say, £300,000, the IHT involved could be up to £120,000. but if 100% BPR applied, the tax could be reduced to nothing.

 

Right or wrong

 

The judge in this case agreed with the Special Commissioner, who had considered the question before it went to court, and decided that 100% BPR was due. So the IHT claimed by the Taxman was reduced to nil. What makes the case of TNDF important is that most tax experts would probably have agreed with the Taxman. So the decision by the judge is very significant when it comes to tax planning. But how can this be put to good use?

 

Planning

 

The result in TNDF means assets merely used in a business can qualify for 100% BPR, and so can be given away and escape IHT entirely. It’s no longer necessary to give away part of the business itself. You can therefore give away value from your business while keeping full control. For example, if you own the premises (not through a company) that your business operates from, you could transfer it into a discretionary trust for your children and there would be no IHT. We will be looking at other tax planning opportunities in a future issue.

 

A word of caution

 

Although the decision in TNDF is law, the Taxman can take his argument to a higher court, namely the Court of Appeal, and if he fails there, the House of Lords.

 

Tip

 

Before giving away business assets you ought to check the legal position with your advisor in case the Taxman decides to appeal the decision.