Business Relief explained
Investments that qualify for BR can be passed on free from inheritance tax upon the death of the investor, provided the shares have been owned for at least two years at that time.
Why Business Relief exists
Business Relief (BR) has come a long way since it was first introduced in the 1976 Finance Act. Then, its main aim was to ensure that after the death of the owner, a family-owned business could survive as a trading entity, without having to be sold or broken up to pay an inheritance tax liability. Over time, successive governments recognised the value of encouraging people to invest in trading businesses regardless of whether they run the business themselves.
BR is a well-established relief dating back 40 years, however, you should keep in mind that the value of an investment may go down as well as up and investors may not get back what they originally put in. Tax rules may change in the future, and the value of tax reliefs depends on your individual circumstances.
The types of business that typically qualify for BR
Not every investment or interest in a business will qualify for BR, but BR will typically be available for:
- Shares in an unquoted qualifying company, even a minority holding
- Shares in a qualifying company listed on the Alternative Investment Market (AIM)
- An unincorporated qualifying trading business, or an interest in one – a partnership, for example.
Most recently, the UK Government’s decision in 2013 to allow AIM-listed shares to be held within Individual Savings Accounts (ISAs) means that investors can now hold BR-qualifying shares within a tax-efficient ISA wrapper.
Key benefits of a BR-qualifying investment
Speed
Making gifts or settling assets into trust usually takes seven years to become completely free from inheritance tax. But an investment in a BR-qualifying company can be passed down to beneficiaries free of inheritance tax on the death of the shareholder provided it has been held for at least two years at that time.
Access and control
Owning BR-qualifying shares allows a client’s wealth to stay in their own name.
BR-qualifying investments do not use the nil-rate band
This means investors can plan for their nil-rate band allowance to reduce the inheritance tax charge on less liquid assets, such as their home, which are otherwise difficult to place outside of the estate for tax purposes.
BR as part of an estate planning strategy
Investing in the shares of BR-qualifying companies can be beneficial if you fit into one of these categories:
You don’t want to give away large sums of money
You can give your money away during your lifetime to reduce the value of your estate, but it’s not an option many people feel comfortable with. However, with a BR-qualifying investment, the shares are held in your name, which means you keep hold of your wealth.
You want to give the inheritance you plan to leave behind the chance to grow
Investing in BR-qualifying companies means your investment has the potential to increase in value. But as with any investment, there are no guarantees, and you could lose some or all of your money.
You want the money you invest to become inheritance tax exempt quickly
Some people are put off by traditional estate planning strategies, such as making gifts or putting money in trust, as these typically take seven years before becoming fully exempt from inheritance tax. With a BR-qualifying investment, the shares become 100% inheritance tax exempt after a holding period of just two years, as long as the shares are still held at the time of death.
What are the risks?
Capital is at risk
To qualify for BR, a company must not be listed on a main stock exchange. Such companies could fall in value, and investors may get back less than they invest.
Tax rules and reliefs can change
Tax rules could change in the future. The value of tax reliefs will depend on an investor’s personal circumstances. There cannot be any guarantee that companies that qualify today will remain BR qualifying in the future.
Shares could be more volatile and less liquid
Investments in unquoted companies or those quoted on AIM can fall or rise more sharply than shares in larger companies listed on the main market of the London Stock Exchange, and may be harder to sell.
What’s next?
Take a look at some of our resources that will help you and your clients get to grips with inheritance tax and BR-qualifying shares.
What’s next?
Inheritance tax investments from Octopus
Explore our range of inheritance tax products that aim to qualify for BR.