Business Property Relief (BPR) is extremely valuable and can provide relief from inheritance tax at 50% or 100% on a transfer of certain types of business or business property. It is available on lifetime transfers, and to relevant business property included in an individual’s estate on death.
Many business owners will be familiar with BPR because of its generosity and, when it comes to succession planning, will seek to take advantage of the relief.
Where a surviving spouse or civil partner is not involved in running a family business, it is common for Partners and Directors to plan for their interest in the business to be sold on their death and the value passed to their families, or perhaps in trust for the family.
The value of their interest may pass into a family trust, rather than to the surviving spouse outright, to avoid BPR being wasted on a legacy that is already tax relieved. If the business assets were to pass to the spouse and then be sold, the relief will not be available in the spouse’s estate on his or her subsequent death.
Where the business owner may go astray is in being too determined to pin down the turning of business interests into cash: a so-called ‘buy and sell’ arrangement may be included in their partnership or shareholders’ agreement. Many taxpayers, however, will not be familiar with the ‘binding contract trap’ and they may be surprised to learn that by entering into an automatic buy and sell agreement they could inadvertently lose the benefit of BPR altogether.
What is the binding contract trap?
It is a lesser known pitfall by which BPR will generally be denied if there is a ‘binding contract for sale’ of the business property at the time of its transfer.
It is here that many get caught out because arrangements on the death of a Partner, Director or Shareholder by which his or her personal representatives are obliged to sell, and the surviving business owners are obliged to buy the deceased’s interest or shares, are viewed by HMRC as binding contracts.
The purpose of this rule is to ensure that BPR only applies to transfers of business property and not to transfers of cash. A binding contract is seen as being as good as cash for these purposes.
How to avoid getting caught out?
Arrangements in partnership, LLP and shareholders’ agreements for the transfer of business interests on death can be structured in such a way that BPR remains available. For example, HMRC generally accepts that the following arrangements will not fall foul of the trap.
- Accruer clauses: in partnership agreements where the deceased’s interest passes to the surviving partners who are required to pay the personal representatives a particular price.
- Options: where the deceased’s business interest falls into his or her estate with an option for the surviving business owners to purchase it.
Birketts can help review the terms of any such arrangements. The content of this article is for general information only. If you would like to discuss any of the issues raised in this article or any other business succession planning issues please do get in touch with a member of Birketts’ Estate Planning Team. Law covered as at July 2016.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at July 2016.