Most dentists know that for dental practices there are generous Inheritance Tax (IHT) reliefs which can work to make practice assets exempt or partially exempt from IHT. This relief is called Business Property Relief (BPR).
There are three key factors that determine whether your practice will attract Business Property Relief.
Not be subject to a binding agreement of sale
Many businesses have been set up so that on death the business is forced to be sold to a partner or spouse, but in this situation you would lose the BPR. So to avoid losing this crucial benefit you can simply use a double option agreement. This works by allowing the deceased’s surviving spouse the option to sell the business back to the surviving partners and also the partners the option to purchase. If either of the two parties takes up the offer the survivor must oblige.
Pass an ownership test
The ownership test broadly means that the business should be owned for the previous two years.
Should be classed as relevant business property
To receive 100% Business Property Relief you need to own a practice or a share of a practice. Other qualifying assets are unquoted securities in a business that gives the transferor control (owning over 50% of the shares) of the practice and unquoted shares in a trading company.
One approach taken to avoid IHT is to buy shares or securities in Alternative Investment Market (AIM) listed stock. After 2 years the assets benefit from 100% BPR.
You can also use BPR to your advantage by setting up a family trust. This can be useful if you’re planning to sell your practice, you want to reduce your IHT liability and you don’t necessarily need all your assets to provide an income. All you need to do before you agree to sell your practice is to set up a family trust and gift your practice property into it.
The assets then immediately qualify under BPR and remain outside your estate for IHT purposes. The only downside to point out is that the assets are now irrevocably outside your estate and the only people that can benefit will be the beneficiaries – typically your children or grandchildren.