Inheritance Tax (IHT) is payable on a deceased person’s estate at 40 per cent above £325,000 (2012/13) – the current nil rate band. However, business property is treated differently from personal property and may qualify for  Business Relief, formerly called, and generally known as Business Property Relief (BPR). Businesses benefit from a more generous taxation system because of their role in providing economic growth.

BPR can provide 100 per cent relief from IHT on a sole trader’s business or partnership interests and can apply to shares in trading companies that are not quoted on a recognised stock exchange. Shares quoted on the Alternative Investment Market can also be eligible for 100 per cent BPR. There is no limit to the value of BPR which can be claimed. Business assets must have been owned by the donor for two years to qualify for BPR and the business in respect of which a claim is made must also be wholly or mainly a trading company. Investment companies and businesses dealing in shares, stocks, securities, lands or buildings do not qualify for BPR.

BPR at 50 per cent is available on land, machinery, plant and buildings used for business purposes, although they will need to have been owned and used mainly for business purposes within the past two years. It is also available for shares in quoted companies where the shareholder has a controlling interest of more than 50 per cent, although this is rare.

In the context of a family business, it may be preferable for a donor to leave IHT-exempt assets to a beneficiary other than their spouse or civil partner. There is no saving if business assets are passed to a beneficiary who would not be liable for IHT anyway. For example, a transfer of business assets qualifying for BPR to a spouse would achieve no IHT saving on that transfer, because transfers between spouses are normally exempt from IHT in any event. There are several issues to consider and expert advice is essential when undertaking IHT planning with regard to business assets.

No BPR is available where there is a binding contract for the sale of a business. This might occur where there are a small number of shareholders who have a shareholders’ agreement which requires that should one of them die, their executors will sell his or her holding to the remaining shareholders, who are required to buy it.

Even where shares would not qualify for BPR, the £3,000 annual tax-free allowance for IHT is available. A shareholder can use this to pass shares to anyone of their choosing. This can be used to give the beneficiary a gradually increasing interest in the company, reducing the IHT payable on the donor’s death. However, care should be taken because the values of ‘slices’ of the shareholdings can vary massively depending on what the voting rights involved are: never transfer shares without taking professional advice on the likely tax implications.

As an alternative approach, a person may choose to sell or wind up their business rather than leave it to beneficiaries in their will. They would then be able to leave liquid capital to their beneficiaries instead. This has the advantage that the value of the business would be precisely fixed and available in cash. However, cash does not qualify for BPR, so this approach has significant drawbacks.

The current law particularly benefits small businesses that are family owned trading companies. They will be likely to qualify for BPR and make the most of the possible IHT saving.