Inheritance tax for corporate groups

Inheritance tax ("IHT") is something of a hot topic politically.  It is expected that Rachel Reeves will be exploring changes as part of her review of what the national press has dubbed the 'wealth taxes'.

Business Relief (formerly business property relief – we'll use "BPR" here) has been in place for many years but is one area that appears to be under particular review, if not threat.  Currently, relief from IHT can be claimed for up to 100% of the value of a business on the occasion that IHT may be chargeable (death or transfer into trust being the most common).  This can apply where the activities of that business are wholly or mainly of a trading nature, and there are no excepted assets.

Any changes to these rules may come in one of the following forms:

• A reduction in scope in terms of businesses that qualify (for example excluding AIM listed companies)
• An increase in the requirement for the trading part of a business to be greater than 80% as opposed to greater than 50% (discussed further below)
• A cap on the total amount of relief that can be claimed

What can you be doing?

Business owners should regularly review their corporate structures to ensure they are prepared for any changes. 

Alternatively, action can be considered in advance of the first labour Budget in order to take advantage of the relief as it currently exists.

Which companies may qualify for BPR?

BPR is available to claim in respect of the value of shares in particular companies, where the shares in those companies have been held for two or more years.  Loosely these companies are:

• Privately owned (i.e. not listed on the FTSE or an international market, although an AIM listing is acceptable)
• Trading businesses (which are not carrying on a business specifically prohibited by the legislation, such as a residential or commercial letting business, or serviced office business)

The company can be carrying out some non-trading activities (investing in let property or listed shares for example) but these must not represent more than 50% of the total activities of the company. 

This is subjective but case law requires the activities of the company to be viewed taking into account several different factors, namely whether the company is predominantly trading or non-trading when viewing the following:

• How the capital is deployed (generally taken to be the value of the assets used for each activity)
• Revenue from trading and non-trading activities
• Profits trading and non-trading activities
• How management time is spent
• How the business appears when looked at 'in the round'

BPR is an all or nothing relief in the sense that if a company meets the conditions the shares will qualify in full, including any investment element of the business, (except in some rare circumstances where only a 50% rate applies).  If the company does not meet the conditions – for example because it is predominantly carrying out investing activities, no relief will apply to the shares at all.

Even where the relief applies, shareholders need to be aware that certain assets of the company can be considered 'excepted', with the amount of BPR restricted accordingly.  The following are examples of potentially excepted assets:

• Excess cash held by the company that it does not require for its current or future activities
• Assets that are used personally by owners or their families (such as a property) – i.e. not used for the purpose of the business.

The qualifying nature of a business should therefore be under constant review, to adapt to commercial changes in the business, and external factors (such as the tax landscape).

What is the position for corporate groups?

The BPR rules can be particularly complex to interpret and apply in the context of corporate groups.  The general rules that apply are as follows:

• It is the value of the shares of the holding company over which a claim is being made, and therefore it is the activities of that company that are important
• A holding company will not be an investment company if its main business is that of holding shares in qualifying trading subsidiaries
• If the holding company has other business, such as holding its own investments or noncontrolling interests in other companies, then a review is required in the same way as set out above, to determine which activity pre-dominates. 
• The shares in a holding company may inherit the ownership period of its subsidiaries if there has been qualifying reorganisation, so if shares in the subsidiaries have been owned for at least two years, BPR can be available for the holding company. 

It is therefore important to look at the group structure in detail when setting up or using a holding company for IHT planning purposes. The BPR position will depend on the structure's individual circumstances, but some key questions to consider include:

1. Are the subsidiaries qualifying subsidiaries (typically where the holding company owns more than 50% of the shares)? If not, they will be treated as an investment of the holding company and could stop the holding company from being mainly trading and qualifying for BPR.
2. Are all the subsidiaries trading subsidiaries? An investment subsidiary will be an excepted asset of the group and will limit the BPR available on the holding company shares. 
3. Are there any intermediate holding companies? These should not prejudice a group from qualifying for BPR. They are treated in the same way as holding companies and should be reviewed in their own right.
4. Are all the assets in the group used for the purposes of the group's trading activities? Assets of one company in the group can be used for the business of another company in the group.
5. Are there any loans between the companies? Loans between companies within the group do not normally present a problem. Loans between the shareholders' wider companies or related non-group companies are a particularly complex area. Depending on their terms, they could be business assets, investment assets or excepted assets.
6. What if the top entity of the group structure is an LLP rather than a company? BPR would not be available to the members of the LLP as the business of that LLP would be holding investments and the holding company rules do not apply. This differs from the normal position in respect of trading partnerships or LLPs, whose members would ordinarily qualify for BPR in respect of their interests.

How can we help?

Whatever your circumstances, our team can advise on your position under your current structure and what options might be available.

Get in touch with one of our team below to find more.