Under the current rules, more and more estates are being dragged into paying IHT than ever before. Big contributing factors to this are the freezing of the IHT nil rate band (NRB) until at least April 2031, pensions falling inside the taxable estate for IHT from April 2027, and the limit placed on the amount of 100% Business Property Relief (BPR) and 100% Agricultural Property Relief (APR) that can be claimed.
It is therefore becoming increasingly important for families, and particularly those with valuable businesses, to plan ahead as far as possible to ensure available reliefs are maximised.
In this article we give some insights into two key areas surrounding BPR and APR that business owners and farmers may need to consider as part of any estate and succession planning.
Valuations and the £5m Limit
Under the old rules, the 100% BPR or APR limit on which business owners or farmers could claim full IHT relief was unrestricted, thereby meaning that providing certain conditions were met, businesses and farms could be passed on to future generations completely free from IHT. Under the new rules, the 100% BPR or APR limit has been reduced to £2.5m for each individual with only 50% relief available above this limit. Where an individual has a spouse or civil partner, this limit is extended to £5m for the couple due to the transferability between spouses of any unused BPR or APR allowance.
The introduction of these limits has presented HMRC with a fresh battleground to attack valuations under or close to the £2.5m or £5m mark. It is likely that many more probate valuations will be attacked by HMRC with the increased incentive to challenge valuations upwards and increase IHT payable. It is therefore important that business owners and farmers with qualifying property plan ahead to get an idea of the value of their business assets and maximise their succession planning opportunities prior to their demise.
One such area of attack for valuations is likely to be around minority discounts applied to shareholdings. Where spouses each own shares in a company, discounts should be applied in line with the joint percentage shareholding of the spouses, and not the shareholdings of each individual.
Both with independent valuers in short supply and HMRC’s Valuation Office Agency already stretched, estate administrators and beneficiaries of estates are likely to be impacted by increased wait times for valuations and therefore increased administration periods.
Excepted Assets & Surplus Cash
A trap to be aware of for company owners concerns “excepted assets”. Excepted assets, and in particular surplus cash, form a key part of HMRC’s challenge to BPR claims, and this is showing no signs of subsiding.
In short, the amount of the share value that is attributable to excepted assets cannot be reduced by BPR. Assets are excepted if they have not been used for the relevant qualifying business throughout the last two years, or if they are not specifically earmarked for an identified future use for the business. Where significant value of the business derives from cash held that is not needed by the business, for example, the portion of the value deriving from that cash does not qualify for BPR.
There is no strict rule on what level of cash is acceptable as non-surplus, and HMRC appreciates that businesses may require different levels of cash from time to time for working capital. For example, seasonal businesses may have significant cash fluctuations throughout the year, whilst businesses may also require a build up of cash ahead of large purchases of fixed assets for the business. It is important however that in these situations, business owners formally document (either via board minutes or otherwise) reasons to support large cash balances held. This documentation can act as evidence to support BPR claims.
HMRC have confirmed that holding excess cash as a buffer to weather uncertainties in the economic climate is not sufficient reason to guard against a restriction on BPR.
Despite there being no strict rule as to what level of cash might be seen as excess, there are certain levels that might immediately flag attention with HMRC, such as cash held of over 20% of annual turnover.
If you would like to confirm your business will qualify in principle for full or partial BPR or APR, please contact David Pescod at david.pescoed@kilsbywilliams.com your usual advisor on 01633 810081 or any of our specialists in estate tax planning. You may prefer to email info@kilsbywilliams.com for more general enquiries and advice.
