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BPR Trust

Business Property Relief 

It is fairly common for spouses, where at least one of them owns a business and they wish to leave this to their spouse upon their death. On first death, this would be free of inheritance tax due to the spousal exemption. Second death should also be considered. If a business qualifies for business property relief, it may also pass IHT free on second death (should it qualify for the full 100% relief). But there is the possibility that by the time second death occurs that BPR may not be available, for example:

  • The surviving spouse may not want to run their late spouse’s business

  • A business partner may want to buy the deceased’s shares off the spouse

  • The surviving spouse may decide to run the business for a while but eventually sell it on in their old age to retire.

  • The business could be run in such a way that BPR no longer qualifies at the date of death

This would lead to an increased Inheritance Tax liability, as an asset which is Inheritance Tax exempt (the business) is replaced by one subject to Inheritance Tax (cash) because Business Property Relief can no longer be applied.


A discretionary trust, which takes all assets which qualify for Business Property Relief, is often used to combat such a situation where a surviving spouse sells the business between first and second death.


The trust is its own legal entity and it will own the business rather than the surviving spouse. Should the business be sold between first and second death, the surviving spouse’s estate is unaffected as the trust owns owning the proceeds rather than the spouse.


A letter of wishes is usually drafted to state that the spouse is to be treated as the main beneficiary of the trust whilst they are still alive. Upon their death, the letter of wishes could either direct that the trust be wound up and assets distributed to the beneficiaries, or alternatively it could continue to run if there a need to protect assets for any of the beneficiaries.


Whilst BPR continues to be available, the business assets can remain in the trust and avoid ongoing anniversary and exit charges where the 100% relief is available. 


By giving the BPR qualifying assets to a beneficiary that is not IHT exempt (the discretionary trust) instead of a beneficiary that is IHT exempt (the spouse), HMRC will be forced to make a decision as to whether the business assets qualify for BPR. If the spouse inherits outright, HMRC do not need to make a decision on whether the business qualifies for BPR as the spousal exemption applies. Knowing whether the business qualifies or not can affect the planning that the spouse wishes to make in the future, for example if the business did not qualify for the relief, they may wish to undertake more lifetime planning than they would if the business did qualify.


The usual benefits of using a discretionary trust will also apply, for example the flexibility to benefit all the potential beneficiaries if the need arises and offering protection from the beneficiaries remarrying and going bankrupt.

How BPR Trusts works

Assets that qualify for full BPR can be passed on to any beneficiary free of any Inheritance Tax.  As a person is automatically exempt from paying Inheritance Tax on any assets left to them by their spouse or civil partner (exempt beneficiaries), it can therefore be a waste to leave these assets to them and, depending what happens with the assets, they may no longer qualify for BPR when the exempt beneficiary dies.   It would therefore be better to leave these assets to non-exempt beneficiaries (for example children or grandchildren).  However, you may not want to leave the assets to non-exempt beneficiaries until your surviving spouse or civil partner has died. 


A Business Trust is a good solution to this problem.  It is a Discretionary Trust in nature, it preserves the BPR and allows both exempt and non-exempt beneficiaries to take the property as and when the trustees think fit as the assets held in the trust are held entirely by the Trustees who control which of the beneficiaries benefit, in what quantities and when. 

These trusts will take in all the business interests you hold at the date of your death that qualify for full BPR.  They can run for 125 years and you should choose multiple beneficiaries or classes of individuals (spouse or civil partner; children; grandchildren; etc.).  It allows the Trustees to use the Trust in a discretionary format and the income and capital can be appointed out as they see fit, taking into consideration a letter of wishes written by you which sets out your reasons for setting up the trust and how you would like them to hold the fund. 

Discretionary Trusts are particularly good for people looking to generation skip (useful for mitigating Inheritance Tax); to control who receives money at the discretion of the Trustees; to look after minors; to manage assets for individuals who are unable to look after it themselves; to protect against those with alcohol or drug addition problems; as a way of protecting a legacy; excluding people you do not wish to benefit.


What is BPR

It's a relief applied to business property and can provide up to 100% relief from Inheritance Tax.

There are a number of conditions which are required to be met:

  • The business must be a qualifying business,

  • The business must be what is referred to as ‘relevant business property’, and;

  • Ownership conditions must be fulfilled.

Business Property Relief (BPR) is a relief given on interests held in businesses and the assets owned by the businesses. 


The main aim of BPR is to reduce the risk of the Inheritance Tax bill resulting in the break up of a business when an owner dies. 


The business interests must have been owned for at least two years to qualify and it must be a business or an interest in a business (sole trader / partnership) or unquoted shares in a company that does not consist wholly or mainly of dealing in shares or securities, land or buildings, making or holding investments and is not subject to a binding contract of sale. 


BPR reduces the value of business assets for Inheritance Tax purposes.  For some assets, the reduction is 100% (full BPR) so the asset is exempt from Inheritance Tax.  For others, the reduction is only 50%.  

It is a relief claimed on death in an attempt to reduce the potential Inheritance Tax by the deceased business owner’s executors.  The deceased will either have died owning a business or shares in it or will have given it away in their lifetime and failed to survive for seven years. 


If an asset is used mainly for the benefit of the proprietor of the business (a sole trader) or their family, it will not qualify for BPR – for example, the private living accommodation above a pub or shop, if it is occupied by the proprietor and / or their family. 


If an asset is not used for the business, it will not qualify.  A typical problem here is surplus cash retained in a company, and if the company has significant amounts of cash, advice should be taken on how to reduce the risk of it being excluded from BPR.  If it can be shown that the cash is required for future use in the business, it may qualify for BPR after all.  For instance, if the cash is for future expansion as per a business plan. 


Property that would otherwise qualify for BPR will get no relief if at the time of the owner’s death it is subject to a binding contract for sale. 


It is not unusual in family businesses for some of the business assets (typically the business premises) to be owned outside the business.  For example, the children may have shares in the company, or be partners in the business, but the business premises are owned by the mother and father as individuals and the business pays them rent for using them. 


Where the property is owned outside the partnership or company, the rate of BPR is only 50%, so half the value of the premises will still be chargeable to Inheritance Tax on the parents’ death and 50% relief is only available if the owner of the property used by a company had a controlling interest in that company (that is, more than half of the voting shares were held by them or by them and their spouse together).  If this is not the case then no BPR will be available and the whole value of the property will be chargeable to Inheritance Tax. 

Beware of director’s loan accounts.  It is quite common for a director or shareholder to have loaned significant sums of money to their company – indeed there are tax planning strategies when a business is transferred to a company which involve deliberately creating a large loan account, because it offers a way of extracting profits from the company without suffering income tax.  The problem is that in the hands of the director, the value of their loan account is an asset (they are owed money by the company) but it is not an asset that qualifies for BPR. 

It must be noted when a person dies and the value of their Estate is above the Inheritance Tax allowance and they therefore require the additional Residence Nil Rate Band allowance, the assets will be valued before any BPR or other reliefs are applied.  


The business must be a trading business rather than an investment business and therefore must meet the ‘wholly and mainly’ test of trading, meaning that the business must not consist wholly or mainly of the making or holding of investments. In other words; businesses which deal in securities, stocks and shares or in land and buildings such as buy-to-let portfolios will not attract the relief.  Property developing itself may attract the relief but the renting out of property is an investment activity therefore making it a mixed business.

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