The Office for Tax Simplification (OTS) has just published an important review of the inheritance tax (IHT) rules. It recommends that the government take forward a number of measures to reform and simplify IHT.
For business owners, the key question throughout the review period has been whether business property relief (BPR) would survive intact, or whether the OTS would recommend abolishing or reforming this important relief.
Under the current rules, BPR generally allows owners of family companies and other private businesses to pass on their shares to the next generation without an IHT charge. This helps to prevent the break-up of businesses on the death of a founder.
The short answer is that the OTS does not recommend abolishing BPR. It uses HMRC data to demonstrate that the extra tax raised by abolishing BPR would not be enough to fund a significant cut in the rate of IHT.
Instead, the OTS concentrates on options for reform. Its recommendations are designed to simplify the operation of BPR and to bring it more closely into line with equivalent capital gains tax reliefs for business assets.
In particular, the OTS recommends that the government should consider restricting BPR so that it covers only those businesses whose activities are 80% or more trading in nature (as opposed to investment). Under current rules, a 50:50 balance between trading and investment activities is generally sufficient to qualify.
That said, some of the other recommendations (in relation to different types of corporate structures) may actually bring some groups within the scope of BPR for the first time.