If your clients own shares in a small company, whether this is their own business or perhaps an investment in an AIM listed company, it is important you correctly establish the inheritance tax position.



Some clients may inform you that their holding will attract Business Property Relief, but you should not assume this is the case without establishing this to your own satisfaction. If the clients are mistaken this can make an enormous difference to their inheritance tax position.

A trading company which is not registered on a stock exchange should qualify for Business Property Relief, provided it does not own any assets which are not essential for the trade.

Business owners can easily fall foul of this “not essential” provision by allowing a large cash balance to accumulate in the company. It will then be down to the company to prove that this large balance was indeed essential for the trade. This may be possible if, for example, there are clear plans for a future project which will need to use the accumulated cash. But be aware this can be a real minefield, and HMRC may challenge the statement that the cash is necessary. Where the Directors’ minutes show a decision was made to set up a sinking fund in order to provide for a defined, necessary future expense, and the excess cash balance can be seen to be in line with this decision, it will be much easier to convince HMRC that the cash is genuinely a required trading asset.

The definition of “trading company” is also important. If the main activity of the company is dealing in securities, land or buildings, or investments, it does not qualify as a trading company for inheritance tax purposes. Land or buildings can be a tricky area, as even if they are not held long term but are bought and sold for a profit HMRC may still try to rule the company is not a trading company. “Property development” is a suitable trading activity, but not simply holding onto property until the price rises and then selling it on for a profit.

When examining your clients’ company accounts always look carefully for potential problems of this kind, either too high a cash balance or property other than the trading premises. In such circumstances always you’re your client obtain written confirmation (or otherwise) from the company accountant that he or she is satisfied Business Property Relief will apply to the full value of the company. Sometimes the accountant’s reply will surprise your client, who has perhaps previously been informed their company is a “trading company for tax purposes”. This is not, of course, the same as saying Business Property Relief will fully apply.

Another pitfall to consider is where your client owns property used by the company. If your client does not control the company (usually by owning 50% or more of the shares) there will be no Business Property Relief on those assets. Even if they do control the company they will still only get 50% relief on those assets, not 100%. This can come as quite a shock to many clients, who may have been advised by their accountant to keep the trading premises outside the company, and never realized the inheritance tax implications of this decision.

So much for clients who own their own business. But what about clients who have invested in a small company which is not their own company? For example, an AIM share listed company?

In theory, the AIM shares should also be subject to Business Property Relief. But again, tread carefully!

For inheritance tax purposes, AIM does not count as a recognized exchange, which is why the relief is available. However, as an AIM company grows it may choose to raise additional funds by seeking a secondary listing. This can often be the case with an overseas company. Once it is listed elsewhere it no longer qualifies for Business Property Relief. This rule is stricter than the rule applying to Enterprise Investment Schemes (EIS). In the case of an EIS company the income and capital gains tax reliefs still apply if it obtains a secondary listing, provided there were no arrangements in place for the secondary listing when the EIS shares were issued. This does not apply to the Business Property Relief rules.

Provided your client sells the AIM holding before the secondary listing occurs and then invests in another company which does not have a full share listing, reinvestment relief will apply and the two year will not be re-set.

It is therefore important for any clients with AIM investments to keep an eye on any announcements about intended secondary listings and act before they take place.

Business Property Relief can be a very valuable relief, but make sure you are aware of the pitfalls and can help guide your clients around them.

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