Business Property Relief (BPR) is one of the few remaining valuable reliefs from inheritance tax.  The relief applies to the transfer of 'relevant business property' by reducing the value of such property for inheritance tax purposes by as much as 100% or 50%.  The transfer can take the form of a lifetime gift to a family member or into a discretionary trust, or alternatively the transfer can take effect on death.

The relief applies in relation to 'relevant business property' such as:

- an interest in a business, ie sole trader or partnership;

- holdings of securities in a company that gave the transferor control over the company;

- holdings of unquoted shares in a company (including the AIM market);

- quoted shares conferring control over the company;

- any land or buildings, plant or machinery used for the purposes of a business or partnership over which the transferor had control (ie owned personally outside of the business) or if the same was held in a trust which the transferor had an interest in possession.

The relief applies at 100% in relation to the first three classes above but at the rate of 50% in relation to the other two classes.

BPR will not be available unless the relevant business property had been held for at least two years.  There is an exception in the case of replacement business property provided the original relevant business property was held for two years of the last five years.

Furthermore the business activity must be wholly or mainly that of a trading business rather than an investment business.  The test applied is to look at all the relevant factors of what a business consists of without giving predominance to any one factor. If the conclusion is that the business is mainly a trading business rather than one undertaking investment activity then BPR will be available on a death or lifetime transfer.  Generally an investment business is a business that deals predominantly with shares or securities, land or buildings, or making or holding investments.

If having considered the above, you are of the view that BPR may apply, you should still take advice as there are many traps that can prevent a business from qualifying for BPR such as:

- 'buy and sell agreements' whereby a company or partnership requires that on the retirement or death of a shareholder or partner the outgoing owner or his personal representatives are required to sell the interest to the surviving members.  Such agreements constitute binding contracts for sale and are not allowable for BPR but can be circumvented if for example 'options to purchase' are stipulated instead;

- large business account cash balances can give weight towards the Revenue arguing that your company is in fact an investment business rather than a trading company;

- if having made a lifetime gift of BPR property, the property in the hands of the donee no longer represents BPR property, then death of either party within seven years will render the gift as a chargeable transfer for inheritance tax purposes.

Even if you have a business that does qualify for BPR, you still need to give special consideration to this when drafting your will.  If your will has been carefully constructed BPR can be fully utilised and in some cases it can in addition achieve further inheritance tax savings.  On the other hand, if special consideration has not been given, then BPR can be wasted or at worst it could result in more inheritance tax being paid.