Q&A: BPR on gift of shares within seven years of death
In this week’s Q&A, Croner-i tax adviser Marsha Haywood explains the tax implications of using business property relief as part of inheritance tax planning when transferring shares
My client transferred some unquoted shares to his son five years ago. The shares at that time would have qualified for 100% business property relief (BPR). The client however is now seriously ill and is unlikely to survive for much longer. The issue is that although his son still owns the shares, the company is no longer trading. Will this be an issue should my client die within seven years of making the gift?
BPR is available on a transfer of value attributable to ‘relevant business property’ where certain conditions relating to ownership periods and types of business are satisfied.
The definition of ‘relevant business property’ is found at Inheritance Tax Act 1984 (IHTA 1984) section 105 and includes unquoted trading company shares. You have advised that the shares, at the time the gift was made, did qualify so we can assume the relevant conditions for BPR had been met.
At the time of making the gift it would have been classified as a potentially exempt transfer (PET). BPR is not required at this point and, in simplistic terms, where the donor survives the following seven years inheritance tax is not chargeable on the transfer.
Sadly, for your client, it does not appear that this seven-year period will be met. As a general principle, when calculating BPR on the donor’s death, the donee must either still own the relevant business property at the time of the donor’s death or, if sold, have replaced it with other relevant business property within three years of the disposal.
BPR can also be withdrawn where the property has been retained by the donee but no longer qualifies for BPR on the date the donor died.
This would appear to be the case here as the company has ceased trading but luckily the legislation contained in s113A IHTA 1984 comes into play.
IHTA 1984 s113A (3) and (3A) states:
(a) that the original property was owned by the transferee throughout the period beginning with the date of the chargeable transfer and ending with the death of the transferor; and
(b) except to the extent that the original property consists of shares or securities to which subsection (3A) below applies, that, in relation to a notional transfer of value made by the transferee immediately before the death, the original property would be relevant business property.
113A(3A) This subsection applies to shares or securities –
(a) which were quoted at the time of the chargeable transfer referred to in subsection (1) or subsection (2) above; or
(b) which fell within paragraph (b) or (bb) of s105(1) above in relation to that transfer and were unquoted throughout the period referred to in subsection (3)(a) above.
Therefore, as long as the unquoted shares qualified for BPR at the date of the original gift and the shares are still unquoted at the date of death BPR will be available on your client’s death, the fact that the company is no longer trading is not an issue.