Inheritance tax on commercial property is a topic that often leaves property owners scratching their heads.
So is commercial property exempt from inheritance tax?
Let’s go into the details and clear up any confusion.
Table of Contents
Is there inheritance tax on commercial property?
Yes, inheritance tax (IHT) applies to commercial property in the UK. When a property owner dies, their estate, including any commercial properties, may be subject to IHT if the total value exceeds the tax-free threshold.
What is Business Property Relief?
Business Property Relief (BPR) is a valuable tool for reducing inheritance tax on commercial property. It can provide either 50% or 100% relief, depending on the nature of the property and how it’s used.
To qualify for BPR:
• The property must have been owned for at least two years
• It must be used for business purposes
• The business must not be primarily for investment purposes
What types of commercial property qualify for Business Property Relief?
This table shows different types of business property relief depending on the structure of the business:
| Property Type | Relief Rate |
|---|---|
| A business or interest in a business | 100% |
| Unquoted shares | 100% |
| Land, buildings, or equipment used in the business | 50% |
| Quoted shares giving control of the company | 50% |
Are there any exceptions to Business Property Relief?
Some commercial properties may not qualify for BPR. These include:
- Properties used mainly for investment purposes
- Properties subject to a binding contract for sale
- Properties not required for future use in the business
How can I reduce inheritance tax on commercial property?
There are several strategies to minimise IHT on commercial property:
- Gift the property at least seven years before death
- Place the property in a trust
- Ensure the property qualifies for Business Property Relief
- Take out life insurance to cover the potential tax bill
What happens if I gift commercial property before death?
Gifting commercial property can be an effective way to reduce IHT. If you survive for seven years after making the gift, it becomes exempt from IHT. However, be aware that this may trigger Capital Gains Tax.
How does Capital Gains Tax affect commercial property inheritance?
When inheriting commercial property, the beneficiary doesn’t pay Capital Gains Tax at the time of inheritance. However, if they later sell the property, they may be liable for CGT on any increase in value since the original owner’s death.
What if the commercial property is part of a business?
If the commercial property is part of an active trading business, it may qualify for 100% Business Property Relief. This can significantly reduce or eliminate the IHT liability.
Can I still claim Business Property Relief if I’ve retired?
If you’ve retired but still own the commercial property used by the business, you may still be able to claim BPR. However, the relief rate might be reduced to 50%.
What about agricultural property?
Agricultural property, including farmland and buildings, may qualify for Agricultural Property Relief instead of Business Property Relief. This can provide up to 100% relief from IHT.
How do I claim Business Property Relief?
To claim BPR, the executor of the estate needs to complete the relevant sections of the IHT400 form when reporting the estate’s value to HMRC.
What if the commercial property is owned through a company?
If you own shares in a company that owns commercial property, these shares may qualify for BPR. The relief rate depends on whether the shares are quoted or unquoted.
Can I get Business Property Relief on a buy-to-let property?
Buy-to-let properties are typically considered investment assets rather than business assets. As such, they usually don’t qualify for Business Property Relief.
What if I use part of my home as a commercial property?
If part of your home is used exclusively for business purposes, that portion may qualify for BPR. The relief would apply to the business-use percentage of the property’s value.
By understanding these aspects of inheritance tax on commercial property, you can make informed decisions about your estate planning. Remember, tax laws can change, so it’s always best to seek professional advice for your specific situation.
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