There are several conditions for the relief and one of them has recently been the subject of a decision in the Upper Tribunal. As a result, HMRC has had to rewrite some of its guidance.
A company must be a trading company for its shares to qualify for BADR. A trading company is one whose activities do not include “to a substantial extent, activities other than trading activities”. Previously HMRC defined ‘substantial’ as “more than 20%” of a company’s income, assets, expenses incurred and time spent by its officers and employees on trading and non-trading activities.
The Upper Tribunal rejected such a prescriptive test and the application of a strict numerical threshold. ‘Substantial’ should be “taken to mean of material or real importance in the context of the activities of the company as a whole”. One must look at the nature of the company’s activities and consider how best to measure their extent. The test is both qualitative and quantitative.
The Tribunal decision may create some uncertainty where companies have some nontrading activities. Business owners may prefer to keep any significant non-trading activities separate from their trading company.
If you do not intend to dispose of your business, your heirs will want its value to qualify for business relief for inheritance tax, given at 100% for unlisted company shares or a business or interest in a business. Businesses that consist wholly or mainly of dealing in securities, stocks or shares, land or buildings or making or holding investments are excluded. If there is a mixture of activities, there is no single test for determining whether its activities are ‘wholly or mainly’ excluded. As with BADR, careful advance planning
