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This article appeared in the Yorkshire Post on Saturday, 11 July, 2009

Keep the Taxman’s hands off your business premises !!

Nigel Shaw

There is a well-known saying that there are no certainties in life except “death & taxes” – unfortunately where these come together, particularly for our business clients, the consequences can be disastrous.

As a consequence we are often asked to assist clients in protecting the business premises from potential charges to Inheritance Tax (IHT), which can sometimes be the most valuable asset after the clients own home, and the following comments should alert those readers to the current options available and more importantly the valuable IHT tax reliefs (surprisingly under this current Government!!) which can still be claimed:

Ownership of premises by a company – this is one of the most common ways to own the business premises and is usually structured in this way for non-tax reasons – i.e. to support bank guarantees etc.  Provided the company’s business is a genuine trading venture & is not one which is  “wholly or mainly” of holding or making investments then the premises should be eligible for what is known as Business Property Relief (BPR). Furthermore the good news is that the rate of relief will be 100% !!

Care needs to be taken where a company’s activities fall into the “holding or making investments” category. We have had a couple of instances over the years, particularly on investment property companies, where a client always believed his business was eligible for 100% relief but was denied this due to the more passive nature of his business activities – e.g. deriving rent from a let property portfolio.

Ownership of premises by an individual – this is where it starts to get more complicated.
If the individual lets the property to his company & continues to have a controlling interest in that company then he will only be eligible for 50% relief.  Effectively, from an IHT perspective, he is penalised for “ring-fencing” the valuable asset outside of his company structure.

Likewise, an individual who uses the premises wholly or mainly for the purposes of a partnership of which he is a partner, will also qualify for 50% relief on the underlying property valuation.

However, those clients who let premises to their company and have a shareholding (including that of any spouse or civil partner) which is less than 50% will not be entitled to any relief and will suffer a potential charge to IHT on an “undiluted” valuation of his trading premises. Care therefore needs to be taken where share transfers are being considered in these circumstances.

Ownership of business premises by pension fund – as the premises are effectively owned in a vehicle which is not ordinarily liable to IHT (there are some exceptional instances though) no issues should generally arise.

Ownership of business premises by a family trust – depending on valuations this could be a tax effective way of avoiding future charges to IHT at the 40% rate and increasingly clients are still looking to transfer, in whole or part, their business premises into trusts provided there are wider family benefits including income tax savings.

Increasingly, HMRC have made it very difficult for taxpayers to avoid paying IHT on their private family properties – it would be quite easy for them to do likewise on valuable business premises as the rates of relief currently available were much less in the early 1990’s (50% & 30% respectively).  So, if you have valuable business premises, please ensure that you review the current basis of how you own these to ensure they are still right for your business but more importantly do not give an opportunity for HMRC to take a “slice out” in IHT.

Garbutt & Elliott are Chartered Accountants and tax advisers, with offices in Leeds (telephone 0113 273 9600) and York (01904 464100).  Nigel Shaw, Trusts & Estate Planning Director, can be contacted at the Leeds office, or by email to nshaw@garbutt-elliott.co.uk.