Protecting Business Property Relief in a £15m Family Textiles Group

Protecting Business Property Relief in a £15m Family Textiles Group

A family-owned textiles group, valued at around £15m, came to us for Inheritance Tax (IHT) planning. Our review uncovered a wider problem with Business Property Relief (BPR), and the project grew into a multi-stage restructure. This is how our team handled it.

At a glance

• Client: an owner-managed textiles group valued at around £15m
• Starting point: an IHT planning brief, which became a full BPR review
• The issue: £4m to £5m of surplus cash had been lent to a property company that bought residential investment properties
• The risk: BPR (on an IHT event) and Business Asset Disposal Relief (BADR) (on a disposal) could be restricted or lost
• The solution: move the property out, reinstate BPR through a hybrid group structure, make gifts into trust, then add a linked investment company for future surplus cash

The client

The clients were the shareholders of an owner-managed, family-owned textiles business. The group was valued at around £15m. They first asked us to advise on IHT planning.

The challenge

Over the years, surplus cash had built up inside the trading group. An independent property company had then been incorporated to buy a portfolio of residential investment properties. It was funded by loans of £4m to £5m from the trading group.

That left the trading group holding significant excepted assets and carrying non-trading activity. Both can restrict or remove BPR on an IHT event, and BADR on a disposal. The shareholders had come for IHT planning. The real exposure was that their main relief might not be there when it was needed.

What we did

• Reviewed the group's BPR position. We prepared a "red-flag" report setting out the key risks.
• Repaid the inter-company loan by transferring the property portfolio. This removed the loan and the property from the trading group's side of the structure.
• Showed the cost of acting against the cost of waiting. We illustrated the Stamp Duty Land Tax (SDLT) and Corporation Tax (CT) costs of the restructure. They were significantly lower than the potential IHT exposure if no action was taken.
• Reinstated BPR through a hybrid group structure within the trading group.
• Advised on gifts into trust following the restructure.
• Designed a linked investment company holding income-only shares above the trading group. It would hold future surplus cash and investments away from the trading group, protecting the BPR and BADR position going forward.
• Sequenced the steps. The gifts into trust were completed before the investment company was introduced. That allowed the ownership of the investment company to mirror that of the top company of the trading group. Significantly more value could then be held in trust through the linked investment company, without being capped by the Nil Rate Band (NRB) or creating unnecessary Chargeable Lifetime Transfers (CLTs).

The linked investment company is Family Investment Company-style. It was set up above the trading group with income-only shares, and held largely through trust.

The outcome

Everything completed as planned. The intercompany loan was repaid through the transfer of the property portfolio, and Business Property Relief was reinstated through the hybrid group structure, so the family's trading shares are protected again for inheritance tax.

The gifts into trust went in first, before the linked investment company was introduced. That meant significantly more value could be held in trust without being capped by the Nil Rate Band, and without creating unnecessary Chargeable Lifetime Transfers.

The family now has a proper home for future surplus cash and investments, sitting away from the trading group. Their BPR and BADR position is protected going forward, and the cost of getting there was a fraction of the inheritance tax exposure they faced if nothing had been done.

Why it matters

Surplus cash is a normal by-product of a successful business. Left in the trading company, or lent out to fund investments, it can put valuable reliefs at risk without anyone noticing. A BPR review is worth doing before an IHT plan is built on top of the structure. The order in which gifts and new companies are put in place can also decide how much value can be protected.

If you would like to know whether your own group's reliefs are secure, see our IHT planning, linked investment company and corporate restructuring pages, or book a call with our team.