For those business people who have built a successful company and now want to pass on their hard earned legacy to their children and grandchildren, how do you structure your company or partnership so it is not liable for inheritance tax?
The recent case of Gill v HMRC highlights the benefits of dressing the part to claim business property relief. Under the current law, businessmen who have built up a private company or partnership in which they own a share can, in certain circumstances, claim inheritance tax relief, thereby saving up to 40% tax on the value of such business holdings. However, to qualify, the business must be structured in a certain way and the owner of the holdings must have held them for at least two years.
The Gill case concerned a farmer who had been engaged in farming his whole life. He lived in a spartan farmhouse, whilst maintaining a considerable fleet of tractors and other farm machinery to work the land for dairy farming. However, Mr Gill did let out the land, so HMRC were trying to argue that the investment value outweighed the trading activities necessary to qualify for inheritance tax relief. That is one of the crucial tests of whether you can claim business property relief; that your business is not wholly or mainly concerned with investment. HMRC requires you to show proof that you work for the business, not simply live off the capital passively, for example by investing in shares in a listed company or by letting out land on long term leases. The ideology behind the law is that you are creating wealth, rather than just living off it.
HMRC look at the activities of a business in the round, so there is not just one test to satisfy. They look at the turnover of the business, so preparation of the balance sheet and the description of the activities is crucial. They look at how profits are generated. They also look at how land and investments are owned, whether separately or through a holding company. It is also important to structure how a business owns subsidiary companies and what assets are owned by those companies. Taking the right steps in the right order when making a succession plan is crucial in this process. As the tribunal stated in their judgement of Mr Gill is:
“…a farmer. He looked like an old farmer, he dressed like an old farmer, he spoke like an old farmer, he acted like an old farmer and he was an old farmer.”
Mr Gill had many machines to assist in the farming business, and the house also looked like a farmer’s house. The key is to look like a trading company, with any investment assets supporting the running of the business. This can be argued even if a business’ trading figures have been affected by Covid-19 or by other factors.
About Chris: With over 20 years’ experience in all aspects of private client work both in England and offshore, Chris enjoys meeting new people to set up their legally appropriate succession planning, tailored to their individual circumstances. Chris is passionate about ensuring his clients have wills, trusts and powers of attorney that balance all their needs. He can advise on pre and post death care and probate administration to take the pain and stress away from potentially distressing and tense situations.