Craig Simpson, Tax Partner at Bates Weston looks at Inheritance Tax, in particular Business Property Relief and considers what plans Rachel Reeves might have in store for the Autumn Budget.
What might the Chancellor have in store for Inheritance tax in the Budget?
Taxes are going to increase in the 30 October Budget but which taxes will be targeted, We have already written on how pension tax relief may play its part. There has been much speculation about a new wealth tax, though Rachel Reeves appears to have ruled that out. But what about Inheritance Tax (IHT) changes? Here we focus on Business Property Relief (BPR) for shares in a trading company.
Business Property Relief (BPR) and the Budget
Broadly, Business Property Relief or BPR is a 100% relief from IHT for the value of shares in a trading company. Since 1992 100% BPR has been available on shares that qualify for BPR enabling them to be passed down the family without attracting IHT. In addition the shares also receive an uplift to their probate value for Capital Gains Tax (CGT) purposes, the higher base cost reducing or often eliminating any CGT payable if they are sold shortly after death.
But could BPR be reduced in the Budget? Anything is possible of course and prior to 1992 IHT BPR relief only applied to 50% of the value of the shares. The question then becomes, if BPR is reduced in the Budget, what issues could that cause?
What are the potential issues with reducing the IHT BPR rate?
- The ability of a trading company to pay 40% on the value of the shares. This could bankrupt a company. Although the IHT could be paid off over 10 years.
- It penalises high capital businesses, i.e. those manufacturing companies who have invested heavily in plant and equipment and property would have a higher IHT burden than a heavily service based industry.
- It would cost jobs. If a company is burdened with an IHT liability it cannot meet then it is possible jobs would be lost.
- It is not business friendly and would stifle growth and investment.
From the Government’s perspective, will the increased tax revenues offset the potential negative consequences of reducing or removing BPR relief?
They may take a lighter approach and do the following:
- Remove the CGT step up to market value on death where BPR is claimed on the shares. This has been a potential change highlighted some time ago by the since disbanded Office of Tax Simplification. It represents a double relief on death.
- BPR can apply to shares in mixed investment and trading companies. There could be a change to exclude investment assets from the valuation of shares for BPR purposes.
- Consult more widely on changing the IHT system in the UK
Of course, we will have to wait until Budget Day on 30 October to see what the Chancellor has in mind, but overall, private business owners are holding their collective breath.
As always, you are reminded that this article is generic in nature and you should take no action based upon it without consulting your professional advisor.