Inheritance tax on commercial property
If a person dies owning a property that is used in a business the values of that property may be subject to inheritance tax (IHT), at up to 40% of its value. However, in certain circumstances the IHT payable will be reduced by the application of business property relief (BPR).
BPR only applies to businesses that are “trading”. In addition, it must not be a business “wholly or mainly… dealing in… land… or making or holding investments”. Therefore a business “wholly or mainly” involved in letting property or buying and selling property is unlikely to qualify for BPR. On the other hand, if the business is not focused on these aspects but ownership of the property is, for example, to allow the business’ trade to be conducted from that property 50% or even 100% of the value of the property may be free from IHT, depending upon the business structure and how the property is owned. This can even be the case if a property owned by the business is let out, as long as this does not constitute the main thrust of the business overall. For example, if a retail business owned a warehouse for the storage of its goods, an office as its headquarters and a number of shops for the sale of its goods, those properties should qualify for BPR. If the business also let out a flat above one of its shops as an additional element of income, that flat may also qualify for BPR as part of the overall business.
If the property is owned by a private company (i.e. not a PLC), the person dying will own shares in the company, rather than owning the property itself. As long as the company qualifies for BPR, the full value of those shares (including the value of the property) would be free from IHT.
If the property is owned by an LLP, partnership or sole trader, and the business qualifies for BPR, the full value would again be free from IHT. If the property is owned by a majority shareholder in a company (rather than by the company itself), by an individual member of an LLP or by an individual partner in a partnership, and again the business qualifies for BPR, 50% of the value of the property would be free of IHT.
Where BPR is available, it may be possible to make even greater savings through careful planning in your will. In any event, a will is essential to ensure that the property is properly dealt with on your death. If you would like any further information, please contact our trust section by emailing trusts@hartbrown.co.uk
This article contains information of general interest about current legal issues. It does not give legal advice and specific advice should always be sought about your particular circumstances. We will be happy to assist.
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