THE UK HAS some of the most complex and voluminous tax legislation in the world, making it all too easy for taxpayers to miss out on valuable reliefs simply because they assume they will be applied automatically. Imagine losing thousands—if not millions—of pounds in tax relief, not because you didn’t qualify, but because you didn’t know how to claim it correctly. Taxpayers often assume that tax reliefs, especially valuable ones, will automatically apply to their financial situation.
In today’s Shipleys Tax brief we look at how misunderstanding tax laws can lead to missed opportunities and financial setbacks and how failing to actively manage and claim tax reliefs can result in costly mistakes using some basic case studies.
(NB: All rates and allowances are as at date of the article.)
The Importance of Actively Claiming Tax Relief
Tax reliefs (such as Business Property Relief (BPR), Capital Gains Tax (CGT) relief, Income Tax reliefs, and Inheritance Tax (IHT) reliefs) can significantly reduce a taxpayer’s liability. However, they are not automatically applied, and taxpayers must ensure they meet specific criteria, actively make claims, and regularly review their tax position to avoid unexpected pitfalls.
Case Study 1: Tribunal Denies Business Property Relief (BPR) Claim
Business Property Relief basics
In the right circumstances Business Property Relief (BPR) allows for the reduction or complete elimination of Inheritance Tax (IHT) on the value of business assets when they are passed on as part of an estate. This relief typically applies to businesses that are trading and do not have the hallmarks of investment trade, the aim being to help protect businesses from being dismantled to pay inheritance taxes.
…taxpayers must ensure they meet specific criteria, actively make claims, and regularly review their tax position to avoid unexpected pitfalls.
Background
A family-owned restaurant that has been actively trading for over a number of years would generally qualify for full BPR, meaning that if the owner passes away, the restaurant’s value would not be subject to IHT when transferred to the owner’s heirs. This ensures that the business can continue without needing to be sold to cover tax liabilities.
The Pitfall: Mrs T’s Fishery Business
In a recent case, Mrs T who had operated a fishery business for 17 years, saw her Business Property Relief (BPR) claim denied by the First-tier Tribunal. The fishery, initially run by her late husband, was once a profitable business involving the stocking of fish. However, after regulatory changes, the business shifted to maintaining a wild fishery with minimal services offered to customers. The tribunal concluded that the business had transitioned into one primarily holding land for investment purposes rather than operating a trading business, disqualifying it from BPR.
Key Takeaway: Regularly review your business model. A shift in business activities or external factors can result in your business being viewed differently for tax relief purposes. In Mrs Pearce’s case, the absence of services like tuition or equipment hire meant the business was classified as an investment, not an active trade.
Case Study 2: Denial of Entrepreneurs’ Relief (ER) on Property Sale (CGT)
Entrepreneurs’ Relief basics
Entrepreneurs’ Relief (now known as Business Asset Disposal Relief) allows individuals to pay a reduced rate of Capital Gains Tax (CGT) of 10% when selling a qualifying business or shares in a trading company, up to a lifetime limit of £1 million. This relief is designed to incentivise business owners and entrepreneurs by lowering the tax burden on the sale of their business.
Background
If a small business owner sells their trading company for £500,000, under Entrepreneurs’ Relief, they would only pay a 10% CGT rate on the sale, rather than the standard rates of 20%. This could result in a significant tax saving of £50,000.
The Pitfall: Denial of Entrepreneurs’ Relief on Property Sale
In another case, a property developer sought to claim Entrepreneurs’ Relief on the sale of a commercial building. The developer believed that the building, held within his trading company, qualified for the relief under Capital Gains Tax (CGT) rules. However, upon review, it was determined that the building had been rented out for several years, and the income from this rental activity was considered non-trading. As a result, the company was no longer classified as a trading company for CGT purposes, and Entrepreneurs’ Relief was denied.
Key Takeaway: Ensure that qualifying conditions are maintained with regular monitoring, usually a good accountant will see to this on an annual review. Entrepreneurs’ Relief is only available if a company is trading. In this case, the shift to generating rental income changed the company’s classification, leading to loss of relief and a significant tax liability.
Ensure that qualifying conditions are maintained with regular monitoring, usually a goods accountant will see to this on an annual review.
Case Study 3: IHT Agricultural Property Relief (APR) Disallowed
Agricultural Property Relief basics
Agricultural Property Relief (APR) allows for up to 100% relief from Inheritance Tax (IHT) on agricultural property, such as farmland, farm buildings, and growing crops, when it is passed on as part of an estate. The goal is to preserve the value of agricultural businesses by reducing or eliminating the IHT burden, ensuring that the business can continue without disruption.
Background
A farmer who owns £1 million worth of farmland can pass that land on to their children with no Inheritance Tax liability, as long as the land qualifies for APR. This can save the heirs up to £400,000 in IHT.
The Pitfall: Agricultural Property Relief Disallowed
A recent IHT case involved a claim for Agricultural Property Relief (APR) on farmland that had been used for grazing cattle. The owner believed the land qualified for relief as agricultural property. However, the tribunal ruled that since the land had not been actively farmed for several years and was primarily used for renting out grazing rights, it did not meet the strict criteria for APR. Consequently, the estate was subject to inheritance tax on the full value of the land.
Key Takeaway: Again as above active farming and monitoring through compliance reviews is critical for APR qualification. Landowners must demonstrate ongoing agricultural use to qualify for this relief. A shift to passive income from land rental, even if it involves agricultural activities, can disqualify an estate from APR.
Conclusion: The Importance of Regular Tax Review
Taxpayers should not assume that valuable tax reliefs will automatically apply or continue to apply without a thorough review of their financial and business activities. Whether it’s Business Property Relief, Capital Gains Tax relief, or Inheritance Tax relief, the rules are intricate, and failing to meet the conditions can lead to substantial tax liabilities. To maximise tax savings, it’s crucial to stay informed, maintain the correct business structure, and consult with tax professionals to ensure ongoing eligibility.
By staying proactive, taxpayers can avoid the costly mistake of missing out on significant tax reliefs.
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Please note that Shipleys Tax do not give free advice by email or telephone. The content of this article is for general guidance only and should not be considered as tax or professional advice. Always consult with a qualified professional before taking action.
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