Capped BPR

The aftershock from the 2024 Budget announcement that inheritance tax (IHT) agricultural property relief (APR) and business property relief (BPR) will be capped is still being felt. While farmers are the main group making noises about the impact, small business owners are also affected, as are individuals who have BPR-qualifying investments, such as shares in AIM-listed companies. One way to preserve the maximum BPR is to give away some of these investments, say to your children. The trouble is there’s a possible catch.

IHT and gifts

Before looking at the particular issue with BPR- qualifying investments we need to recap the general IHT rules for gifts. If you make a gift to an individual and survive seven years, it becomes exempt from IHT. Thus, at the time of the gift it’s referred to as a “potentially exempt transfer” (PET). If you don’t survive seven years it’s known as a failed PET and its value is included in your estate when IHT is calculated.

BPR and lifetime gifts

If you give away an asset that qualifies for BPR, such as AIM shares, there are further rules if the PET fails. If the person receiving the gift wants to retain BPR:

• they must have owned the assets from the date of the gift until your death (or their own, if that’s earlier); and
• for unquoted shares, such as those listed on the AIM, they must remain unquoted.

If the person you gifted the assets to, say your son, sells them before your death, the first condition is not met and so BPR is immediately lost.

Example. You give shares worth £300,000 to your son who sells half of them soon after and invests the proceeds in a non-BPR qualifying asset, e.g. a savings account. Six years later you die and so the gift of AIM shares is a failed PET. Although all the shares you gave away qualified for BPR at the time, because your son sold half of them the BPR on that part is lost. Any IHT payable as a result of this will normally be payable by your son.

Replacement property solution

If the assets have been sold, there is a possible remedy. Using our example, if your son uses any of the proceeds to purchase BPR-qualifying replacement assets, the IHT relief is not lost on the amount reinvested. Your son would have up to three years from the date he sold the AIM shares you gave him in which to make a qualifying reinvestment.

When making a gift that can easily be converted to cash, such as AIM shares, make the conditions of BPR clear to the recipient. Point out that if BPR is lost any IHT becomes payable as a result and it’s they who will be liable to pay it. Explain that they can sell and reinvest the money without losing BPR if the new investment also meets the conditions for BPR, e.g. investing in their own trading business.