Joe Brough looks at the implications on capital taxes for companies holding investment assets.
Over time, profitable companies will increase their cash and distributable reserves if not paid out to shareholders. To facilitate further growth, these reserves may be invested into non-trading assets.
Business property relief
Where an individual dies owning shares in a trading company which they have held for two years, business property relief (BPR) provides relief from inheritance tax.
For deaths up until 5 April 2026, the BPR legislation (IHTA 1984, s 105(bb)) provides for 100% BPR to apply to all shareholdings in unlisted trading companies. From 6 April 2026, 100% relief will only apply to the first £1m of combined qualifying agricultural and business assets, with 50% relief for qualifying assets over £1m.
For listed trading companies (under IHTA 1984, s 105(cc)), 50% relief is available, but only where the individual has a controlling shareholding. Where a company exists ‘wholly or mainly’ for the purpose of making investments, no BPR relief is available (IHTA 1984, s 105(3)).
For BPR, the ‘wholly or mainly’ test is satisfied if the company’s trading activities are more than 50% of its total activities. The ‘wholly or mainly’ test is important because, if passed, it means that a company will qualify for BPR when it holds investment business assets. The 50% threshold is based on a ‘balance of indicators’, which are outlined later in this article.
Investment business assets are treated differently for BPR purposes than ‘non-business’ or ‘excepted’ assets. These latter assets are always disallowed for BPR (under IHTA 1984, ss 110 and 112, respectively). An excepted asset is one which has not been used ‘wholly or mainly’ for trading purposes throughout the two years preceding the transfer (or such lesser time as the asset was owned), or is not required for future business use.
Where they produce an income stream, investment properties held within companies would likely satisfy the business use test and not be treated as excepted assets. Therefore, as long as the ‘wholly or mainly’ trading threshold is reached for the company as a whole, BPR will be available on the shareholding.
BPR and lifetime transfers
A lifetime gift of unquoted shares will be either a ‘potentially exempt transfer’ (PET) between individuals, or a ‘chargeable lifetime transfer’ (CLT) in other cases. If the transferor dies within seven years of making the gift (or if earlier, on the death of the transferee), the gift will be reassessed for IHT purposes.
Where the original gift qualified for BPR, under IHTA 1984, s 113A(3)(a) and 113A(3A)(b) the relief will still be available, as long as the transferee has retained ownership of the shares since the original gift, and they are still unquoted at the date of death. If the shares have been disposed of, relief will still be available if qualifying replacement property has been purchased (IHTA 1984, s 113B).
As there is no requirement that the company itself must still satisfy the ‘wholly or mainly’ trading condition at the date of death, BPR will not be lost where, following a lifetime gift, a company alters its activities to become ‘wholly or mainly’ an investment company.
Business asset disposal relief
For the tax year 2024/25, business asset disposal relief (BADR) provides for the first £1m of lifetime qualifying capital gains to be taxed at a rate of 10% (14% from 2025/26). Relief for gains on share disposals in trading companies is available (TCGA 1992, s 169). To qualify for relief, an individual must have held the shares for a minimum two-year qualifying period, have been an officer or employee of the company, and the company must qualify as an individual’s ‘personal company’ (TCGA 1992, s 169S(3).
For BADR, a trading company is defined (by TCGA 1992, s 165A(3)) as a company which carries on trading activities, and does not carry on other activities to a ‘substantial’ extent. It is important to note that for BADR purposes, the ‘substantial’ threshold has a different definition from that in relation to BPR. For BADR, the threshold test is a minimum of 80% trading activities, compared to 50% for BPR. The balance of indicators used for BADR is the same as for BPR.
Where a company holds large cash reserves or other investment assets, this may mean that BADR is not available on the disposal. For borderline cases, it is advisable for companies to keep records and board minutes of the intended use of any substantial cash reserves, which would support a trading motive.
Balance of indicators
The availability of BPR and BADR depends on the company passing the ‘trading’ thresholds. These thresholds differ for each relief, but the balance of indicators is broadly the same, and can be summarised as follows:
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Asset base – does the value of trading assets outweigh non-trading assets?
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Income – does the majority of turnover come from trading or non-trading activities?
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Time spent – is the majority of time spent by employees on trading or non-trading activities?
The indicators should be looked at in the context of the company as a whole to determine if the threshold is met. A more detailed analysis of how HMRC applies these indicators is given in their Capital Gains Tax Manual at CG64090.
Due to the different trading thresholds for BPR and BADR, it is important to understand which relief is likely to be more valuable to a taxpayer. If a shareholder has no intention of selling their shares during their lifetime, there is more scope for the company to hold investment assets if BPR will be claimed on death.
Gift relief on shares
For gifts of shares in unlisted trading companies, gift relief can be claimed (under TCGA 1992, s 165). Where full relief is available, this allows shares to be transferred between individuals without incurring an immediate capital gains tax charge, with the gain on the disposal being deducted from the transferee’s base cost.
For companies holding non-business assets, relief is restricted when:
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at any time within the period of 12 months before the disposal, the donor was able to exercise at least 25% of the voting rights in respect of the company; or
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the donor is an individual and, at any time within the period of 12 months before the disposal, the shares gifted were in their personal company.
The amount of relief available is restricted by multiplying the gain by ‘A/B’ where:
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A is the value of ‘chargeable business assets’; and
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B is the total value of ‘chargeable assets’.
When looking at the definition of ‘business assets’ for gift relief purposes, it is not sufficient for the asset in question to just be used within the business. To qualify as a ‘business asset’ it must be used in a ‘trade, profession or vocation’ carried on by the company. An investment property would therefore not qualify as a business asset and would result in a restriction to the relief.
Rollover relief
Rollover relief (under TCGA 1992, s 152) can be claimed when a company disposes of a trading asset within TCGA 1992, s 155. This includes land and buildings, fixed plant and machinery, and goodwill. Any gain arising on disposal can be deferred by reinvesting the proceeds into other qualifying assets.
For almost all assets listed within TCGA 1992, s 155, to qualify for relief the whole asset must have been used wholly for trading purposes. However, for buildings, TCGA 1992, s 152(6) provides a relaxation for this condition. This applies where, at the time of sale, only part of a building is used for trade purposes, with the trading and non-trading parts treated as separate assets.
This is applicable if a company uses part of its trading premises for investment purposes (e.g., by letting out surplus space). Whilst rollover relief cannot be claimed for the part let out, the usual rules apply to the trading portion under section 152.
Where the replacement building is only used partly for trade purposes, section 152(6) works in the same way to allow relief to be claimed on the purchase of the part which will be used for trading purposes. Where applied, consideration for the qualifying and non-qualifying elements is apportioned on a ‘just and reasonable’ basis (under s 152(11)).
If the building disposed of was used for non-business purposes during the period of ownership, relief is also restricted (by s 152(7)) to the period the building was used within the trade.
Practical tip
A taxpayer’s capital tax position should be regularly reviewed. As capital taxes generally have a longer-term horizon than those affecting the day-to-day running of the company, changes in the taxpayer’s plans and legislation can significantly impact the tax position.
