Business Property Relief (BPR) – some of you will have heard of this , some of you will not have. Some of you might not be too interested in the sound of it BUT, finding out more now could leave your family better off in the event of your death!
BPR is applicable to shares in a private company and, if the right steps are taken, means that the value of those shares can be excluded from the value of an estate for Inheritance Tax purposes. In a private company, where one shareholder intends to leave shares to another, who already holds the remaining shares, there is little to worry about. However, if those shares are to go to someone else, someone who does not currently have any connection to the company itself, there could be a problem. The deceased might well have wanted their beneficiaries to benefit from the value of the shares but do the remaining shareholders want the beneficiaries to suddenly have a degree of control over their company? Perhaps not, and that is what the passing of ownership of those shares could result in.
Often, to avoid this situation, shareholders in a business will agree that any such shares should be bought by the surviving shareholders, allowing them to maintain their control and interest in the business, and the proceeds would then go to the person named by the deceased.
Her Majesty’s Revenue & Customs (HMRC), however, view any such agreement as a contract for the sale of the shares which has been concluded prior to the date of death. The estate of the deceased therefore, in their eyes, does not consist of the shares but the value of those shares which will, in all probability, increase Inheritance Tax liability as BPR cannot be claimed.
One common solution to this is to give the appropriate parties an option to purchase the shares. By its very definition an option might not be exercised and thus it does not constitute a binding agreement or contract. The simplest and most effective answer is to have an agreement between the existing shareholders that any such shares will pass to the beneficiaries but that they will be the subject of an option granted to the existing and surviving shareholders allowing them to purchase them. BPR can then be claimed on the shares when they pass under the terms of the will of the deceased and, if the option is exercised, the remaining shareholders can purchase the shares thereby retaining control of the business. In addition to this the shares are re-valued for Capital Gains Tax (CGT) purposes on death and as such the remaining shareholders should not be liable for a CGT bill.
In this scenario of course the existing shareholders have an option….an option to purchase the shares which are changing hands. If they do not exercise that option then those shares might belong to someone who doesn’t want them. A prudent shareholder, in order to protect their beneficiaries, might well have a further option granted providing for the sale of the shares to the surviving shareholders – thus both parties have the guarantees in place that they require and tax liability is minimised.
A share is an asset. If it is being bought and sold then cash is required. If the surviving shareholders do not have enough money to purchase the shares personally then the company could purchase them. In order for this to happen the documents of the company must allow it, there must be no agreement between the parties preventing it, and the company must have the distributable profit to make the purchase. If the company doesn’t have the distributable profit available then it may make the purchase out of capital but the directors and shareholders must adhere to the formalities required by the Companies Act 2006 before doing so. The simple solution is to take out life policies either in the name of the company for the lives of the shareholders (but the advice of an accountant is recommended to ensure that there are no tax consequences), or by the shareholders individually on trust for each other. If this is enacted, together with the cross option agreements, then the money should be available and both the remaining shareholders and the beneficiaries will get the result they wanted.
HMRC of course, could, potentially, lose out on a significant sum from Inheritance Tax.
To maximise the benefit of BPR it is essential that all companies and shareholders obtain the correct advice and ensure that the required agreements and Wills are in place.
