BPR shelters the value of your business from the HMRC. The trouble is though, when you retire from your unincorporated business, the relief disappears immediately. CHW explain how you can preserve it.
While the value of your business is part of your estate, it escapes a charge to inheritance tax (IHT) if BPR applies. BPR can apply to lifetime gifts of business assets which would otherwise be chargeable to IHT, for example, a gift of shares in your company via a trust and to business assets in your estate when you die. When you retire from your business BPR can disappear overnight.
If you’re in a business partnership the value of your share of it qualifies for BPR subject to certain conditions. If you leave the partnership and take your capital with you, BPR immediately ceases to apply to it.
By itself, leaving your capital in the partnership after you’ve retired won’t prevent the loss of BPR.
However, you can preserve some BPR on your partnership capital by remaining a member of the partnership even in a vastly reduced capacity. You can cease to have an active role in the business and the management of the partnership but still be a member of it.
Continuing to be a partner will, of course, require agreement from the other partners. This will probably be coupled with a reduction in your share of the partnership profits so they are commensurate with your financial involvement and your continuing legal obligations as a partner.
In practice, this sort of arrangement is more suited to a family-owned partnership where there are common interests and ties, but it can be suitable for any partnership.
Don’t leave the planning until the last minute. This kind of rearrangement takes time to translate into a formal agreement and, as a partner, bear in mind that you are jointly and severally liable for the debts of the partnership even if you only have a very minor role.
If you’re a sole trader when you retire, the business will come to an end unless you sell it. Either way, the capital you had tied up in your business will immediately cease to qualify for BPR as soon as you stop trading.
You could create a partnership before you stop trading and continue as a member on the terms we described above. A family member you can rely on to continue the business for a long time is probably the best candidate. It doesn’t matter if the type of business carried on by the partnership is different from the existing trade. It’s your position as a partner that counts.
Alternatively, you could set up a company with you and one or more other people as shareholders and transfer your business to it. You can receive shares in exchange for the value of the business. The advantage of this route is that there’s no requirement for you to play a part in the running of the company.
If you’re in partnership ask the other partners if you can keep your capital invested in the business and remain a partner but with a negligible role. If you’re a sole trader approaching retirement, consider taking on a partner who will continue the business or transfer your business to a company and bring in other shareholders.
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4 August 2020
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