PRESERVE YOUR INHERITANCE – Using Business Property Relief

BPR: The basics

Undoubtedly, the relief from IHT for business property is the most powerful relief in the whole of the UK’s IHT code. An interest in a business or shares in a company qualify for relief at 100%, that is their whole value is completely left out of account in charging the tax on death or lifetime gifts. Any kind of business will qualify for the relief, so long as it isn’t trading in shares or land etc., or a business of making or holding investments.

Fifty per cent relief is available for certain assets, like properties, that aren’t actually held within the business but are used for the purposes of a business, which you are carrying on either personally or through a company you control.

Furnished holiday lets

The question of whether a business is investment or trading in nature is a very topical one at the moment, in the context of furnished holiday lets. The case of Pawson recently heard at the Tribunal represented a runaway victory, or so it seemed, for the taxpayer. Reading between the lines of the case, it looks as though the old lady whose IHT was in question actually did very little but receive the rents from holidaymakers who visited her cottage in East Anglia. This therefore put her squarely within the Revenue’s new practice (it changed its approach a few years back without telling anyone), and even though furnished holiday accommodation is treated as a trade for other taxes, it isn’t automatically treated as a trade for IHT. The Tribunal thought otherwise, but unfortunately this case has been overturned more recently on appeal.

So, at the moment, owners of furnished holiday accommodation have no idea whether their asset will qualify or not. In a way, the judgment of the appeal judges is just as attackable in the opposite direction as the original judgment in favour of the taxpayer was. They both almost said the equivalent of ‘it stands to reason that furnished holiday letting is a trading/investment (delete whichever is applicable) business’. Our own view is that some businesses will qualify and others won’t, depending on how active the owner’s involvement actually is. The more active, the better.

But so much for the basics. What were those interesting tax-planning ideas we were talking about?

1. Turn 50% (or 0%) relief into 100% relief

It’s surprising how often people get this one wrong. We’ve just mentioned the rule that says that if you hold a property outside the business you get 50% relief if the business itself qualifies. But this relief is only 50%. Indeed, it’s worse than that if the business is carried on by a company and you, as an individual, don’t actually control that company (for example if you own the shares 50/50 with a business partner). In this instance, holding the property outside the company is a tax disaster, because you get no BPR at all, even if the property is fully utilised in a trading business.

Even worse is the situation where the business property is held in a separate company, which you own in parallel with your trading company. If you do it like that, you haven’t just fouled up your IHT planning position: you’ve also made a pig’s ear of your capital gains tax as well!

People often set up things like this to ring-fence what may be the most valuable business asset (the property) from any financial disaster that might strike the trade itself, for example a disastrous legal claim or losses made for other reasons.

But there is a way you can get the tax benefits without endangering the property asset in this way. One version of this is to put the property in a holding company which then owns the shares in the trading subsidiary company. Because, overall, you are looking at a 100% trading position, your shares in that holding company will qualify for 100% relief. There is an equivalent, which is arguably even better from the point of view of other taxes, in the context of LLP-based structures.

2. The ’50% rule’

Clever use of the ’50% rule’ will enable you to get relief for assets that are not actually trading in nature at all, but merely investments.

How can this be, when we’ve just said that BPR isn’t available for investment businesses, under the heading of ‘The basics’ above?

Simple: BPR is only denied if the ‘business’ in question comprises ‘wholly or mainly’ the making or holding of investments. The Revenue, no doubt correctly, interprets wholly or mainly as meaning more than 50%. Ergo, if your business is no more than 50% investment in nature it will still qualify for the relief in full.

So if, for example, you are in partnership and that partnership has assets (perhaps property or goodwill) worth £1 million, there’s no reason why you shouldn’t smuggle in a buy-to-let property, which would normally be treated as a fully IHTable investment, into the business. Its value will then form part of the overall value of a business which comprises at least 50% trading assets, and therefore is eligible for relief.

3. Property development or property investment?

Regular readers of these words will be familiar with this principle. Where you have a property portfolio, the question of whether its value is taxable on your death or on lifetime gift is one of what is going on in your mind. Do you hold the properties for the purpose of developing and selling at a profit or do you hold them for the purpose of long-term rent? If the former, you are a property developer with a business that is 100% outside IHT. If the latter, the whole value of the investment property portfolio is chargeable, in principle, at 40%.

So why is this mentioned in a list of planning points?

The answer is, because the distinction depends entirely, in the final analysis, on your intention. And intentions can change. Let’s take the example of the elderly person, perhaps in ill health, who has held a portfolio of properties for some years without change, and is living off the rents.

This is a prime candidate for planning of this sort, because if nothing is done to change that old person’s intention (which the Revenue will assume to be an investment intention) the whole amount will fall into his estate, and that could be rather soon.

He could, if circumstances were right from the commercial point of view, enter into partnership, perhaps with younger members of his family, with a view to developing the portfolio actively for sale. In principle, there is no reason why the whole portfolio should not thereby be transformed, literally overnight, into a completely non-taxable asset. But you need to make sure that the evidence is there, and one way to do this is to change the whole structure within which the portfolio is held into a corporate structure, more associated with trading businesses.

Note that this overnight transformation even gets round the normal rule that applies for BPR to the effect that you must hold the business property for at least two years before it qualifies. (This rule was clearly brought in to prevent ‘deathbed planning’.) The rule doesn’t say that the properties concerned need to have been business property for two years: merely that they need to have been owned for at least two years.

4. Double-dipping

This is one of our favourites, and works like this. Mr A has just died, leaving the shares in the family trading company, worth £1 million, together with £1 million cash, to his widow. As a bequest between spouses, this is completely exempt from IHT.

Mrs A, when she has recovered from her grief, consults a tax advisor, who suggests that she vary her late husband’s will to leave the shares in the family trading company to the children. This she duly does, leaving behind the £1 million cash that she has received. The variation of the will doesn’t give rise to any IHT, because of BPR. Fine.

The next stage, perhaps after an interval, is that Mrs A offers to buy the shares in the company back from the children. She pays them £1 million cash, and therefore they have the cash and she has the shares. (They make no capital gain because they are treated as having acquired the shares in the company at probate value on the death of the old man, that is £1 million.)

On Mrs A’s subsequent death, she leaves the shares back down a generation again, and the same shares therefore qualify for BPR again.

The result? The £1 million cash, which would have borne tax on Mrs A’s death, has been passed down a generation without IHT, by way of ‘double dipping’.

Jim Storm’s articles appear regularly in The Schmidt Tax Report, a monthly newsletter aimed at showing UK taxpayers ways they can pay less tax.

The Basics of Japanese Gardening

Things to keep in mind for a beautiful garden

Main principles on the garden’s design

Bring the Japanese feeling into your garden with these basic steps. First of all, embrace the ideal of nature. That means, keep things in your garden as natural as possible, avoiding to include things that could disrupt this natural appearance.

For example, don’t include square ponds in your design as square ponds are nowhere to be found in nature. Also, a waterfall would be something closer to what exists in nature if we compare it to a fountain. So you also have to consider the Japanese concept of sumi or balance. Because one of Japanese gardening design main purposes is to recreate large landscapes even in the smallest place. Be careful when choosing the elements for your garden, because you don’t want to end up filling your ten by ten courtyard with huge rocks.

As a miniaturized landscape, the rocks in the garden would represent mountains and the ponds would represent lakes. A space filled with sand would represent an ocean. By that we assume that garden masters were looking to achieve a minimalistic approach, best represented by the phrase “less is more”.

The elements of time and space

One of the things westerners notice at first are the many portions of empty space in the garden. In fact, these spaces are an important feature in Japanese gardening. This space called ma, relates to the elements around it and that also surround it. The concepts of in and yo are of vital importance here, they are best known to the Western civilization by the Chinese names yin and yang. If you want to have something you have to start with having nothing. This is an idea quite difficult to understand, but it is a rule of thumb in Japanese gardening.

An important clue in the development of a garden is the concept of wabi and sabi. There’s no literal English translation for those words. Wabi is about uniqueness, or the essence of something; a close literal translation is solitary. Sabi deals with the definition of time or the ideal image of something; the closest definition might be time strengthened character. Given the case, a cement lantern that might appear unique, would lack of that ideal image. Or an old rock covered in lichens would have no wabi if it’s just a round boulder. That’s why it is important to find that balance.

Ma and wabi/sabi are connected to the concepts of space and time. When it comes to seasons, the garden must show the special character of each one. Japanese garden lovers dedicate time to their gardens every season, unlike the western gardener who deserts in fall just to be seen again in spring.

A very relaxing view in spring is given by the bright green of new buds and the blossoms of the azaleas. In summer, the lush foliage in combination with the pond offer a powerful and fresh image. The vivid spectacle of the brilliant colors of dying leaves in fall are a prelude for the arrival of winter and its white shroud of snow.

The two most important gardening seasons in Japan are spring and winter. Japanese refer to the snow accumulated on braches as Sekku or snow blossoms. Yukimi, or the snow viewing lantern, is another typical element of the Japanese garden in winter. The sleep of the garden in winter is an important episode for our Japanese gardener, while for the western gardener spring is the beginning of the work at the garden. Maybe because of the eastern point of view as death like part of the life cycle, or perhaps the western fear to death.

About garden enclosures
Let’s see the garden as a microcosm of nature. If we’re looking for the garden to be a true retreat, we have to ‘set it apart’ from the outside world. Because of that, fences and gates are important components of the Japanese garden.

The fence and the gates have both symbolism and functionality. The worries and concerns of our daily life have to stay out of this separate world that becomes the garden. The fence protects us from the outside world and the gate is the threshold where we leave our daily worries and then prepare ourselves to confront the real world again.

The use of fences is based in the concept of hide/reveal or Miegakure. Fence styles are very simple and are put in combination with screen planting, thus not giving many clues of what hides inside. You can give a sample look of your garden by cutting a small window in the solid wall that encloses your garden if that’s the case. Sode-gaki, or sleeve fences, are fences attached to an architectural structure, that will only show a specific view of the garden from inside the house. Thus, we’re invited to get into the garden and enjoy it in its entirety. That’s what makes the true understanding of the garden, to lose in it our sense of time and self.

Basic Arrangements
Despite the fact that certain rules are applied to each individual garden, don’t think that there’s just one type of garden. There are three basic styles that differ by setting and purpose.

Hill and Pond Garden (Chisen-Kaiyu-skiki)
A China imported classic style. A pond or a space filled with raked gravel fronts a hill (or hills). This style always represents mountainous places and commonly makes use of vegetation indigenous to the mountains. Stroll gardens commonly use this style.

Flat Garden (Hiraniwa)
It derives from the use of open, flat spaces in front of temples and palaces for ceremonies. This is an appropriate style for contemplation and that represents a seashore area (with the use of the right plants). This is a style frequently used in courtyards.

Tea Gardens (Rojiniwa)
Function has a greater importance than form in this type of garden. The Roji or dewy path, is the main point of the garden, along with the pond and the gates. This would be the exception to the rule. The simple and sparse plantings give a rustic feeling to the garden.

Formality has to be taken in consideration
Hill and pond and flat styles may be shin (formal), gyo (intermediate) or so (informal). Formal styles were to be found usually at temples or palaces, intermediate styles were suitable for most residences, and the informal style was used in peasant huts and mountain retreats. The tea garden is the one that always fits in the informal style.

The garden components

Rocks (ishi in Japanese) are the main concern of the Japanese garden. If the stones are placed correctly, then the garden shows in a perfect balance. So here are shown the basic stone types and the rules for their positions.

The basic stones are the tall upright stone, the low upright stone, the curved stone, the reclining stone, and the horizontal stone. These must be usually set in triads although this doesn’t happen always. Two almost identical stones (by way of example, two tall verticals or two reclining stones), one a little quite smaller than the other, can be set together as male and female, but the use of them in threes, fives, and sevens is more frequent.

We have to keep away from the Three Bad Stones. These are the Diseased stone (having a withered or misshapen top), the Dead stone (an obviously vertical one used as a horizontal, or vice versa, like the placement of a dead body), and the Pauper Stone (a stone having no connection to the several other ones in the garden). Use only one stone of each of the basic types in any cluster (the rest have to be smaller, modest stones also known as throwaway stones). Stones can be placed as sculptures, set against a background in a two-dimensional way, or given a purpose, such as a stepping stone or a bridge.

When used as stepping stones they should be between one and three inches above the soil, yet solid underfoot, as if rooted into the ground. They can be put in straight lines, offset for left foot, right foot (referred as chidori or plover, after the tracks the shore bird leaves), or set in sets of twos, threes, fours, or fives (and any combination thereof).

The pathway stands for the passage through life, and even particular stones by the path may have meaning. A much wider stone placed across the path tells us to put two feet here, stopping to enjoy the view. There are numerous stones for specific places. When observing the basic design principles, we can notice the exact character of the Japanese garden.

Water (mizu in Japanese) plays an important part in the composition of the Japanese garden because of Japan’s abundant rainfall. Water can be represented even with a raked gravel area instead of water. A rushing stream can be represented by placing flat river stones closely together. In the tea garden, where there isn’t any stream or pond, water plays the most important role in the ritual cleansing at the chozubachi, or water basin. As the water fills and empties from the shishi-odoki, or deer scare, the clack of bamboo on rock helps mark the passage of time.

The flow of water, the way it sounds and looks, brings to mind the continual passage of time. A bridge crossing the water stream is often used as a landscaping complement. Bridges denote a journey, just as pathways do. Hashi, in japanese, can mean bridge or edge. Bridges are the symbolic pass from one world into another, a constant theme in Japanese art.

Plants or Shokobutsu may play a secondary role to the stones in the garden, but they are a primary concern in the design too. Stones represent what remains unchanged, so trees, shrubs, and perennials have to represent the passing of seasons. Earlier garden styles used plants to make up poetic connotations or to correct geomantic issues, but these have little meaning today.

As the the Heian style diminished under the Zen influence, perennials and grasses fell out of use. So, for a long time, there were only a few plants that tradition allowed for the garden. However, in modern Japan, designers are again widening the spectrum of materials used. It is highly recommended that native plants are chosen for the garden, because showy exotic plants are not in good taste. Be aware that native plants are used in the garden, because it is in bad taste to use showy exotic plants. Although pines, cherries and bamboo immediately remind us of Japanese gardens, we encourage you to use native plants of your locality that you can find pleasing. If we choose evergreens as the main plant theme and combine it with deciduous material that may provide seasonal blooms or foliage color we can recreate the look of the Japanese garden.

Now the next thing taken in consideration in a Japanese garden are the ornaments or Tenkebutsu. Stone lanterns are, for westerners, a typical impression of Japanese gardens.Stone lanterns are not important components of the Japanese garden. The reason is that ornaments are subjected to the garden’s design. Lanterns, stupas, and basins are just architectural complements added when a point of visual interest is necessary to the design.

A good way to finish yor garden design could be a well-placed lantern. The three main styles (although with many variations) are: The Kasuga style lantern, is a very formal one featuring a stone base. In the Oribe style lantern, unlike the Kasuga style, the pedestal is underneath the ground. The Yukimi or Snow-Viewing lantern is set on short legs instead of a pedestal. Consider the formality of your garden setting to choose the appropriate lantern.

When possible, elements from outside the garden can be included in it. For instance, you can work a far away mountain including the scenery in your design, framing it with the stones and plants existing in the garden.
The borrowed scenery (shakkei in Japanese) can be: Far (as in a far away mountain); near (a tree just outside the fence); High (an element seen above the fence) or low (like a component seen below a fence or through a window in the fence).

As much as it is perceived to contradict our sense of enclosure, it reminds us of how all things are interconnected.

The feel of your garden
The Japanese garden is a subtle place full of contradictions and imperatives. Where firmly established rules are broken with other rules. If you meet the Buddha on the road, you must kill him is a Zen paradox that recommends not to stick so tightly to rules, and the same goes for Japanese gardens.

When building a Japanese garden, don’t get too attached to traditions that hold little meaning for you. It would have no function to recreate a Buddhist saints garden. This also applies to trying to remember the meaning of stone placements, as this method is no longer used in Japan, or even in the United States, due to the lack of meaning for us in the modern world.

That’s why we have selected a few gardening suggestions that do hold relevance and integrate them into a garden. These three ideas on gardening will give direction to achieve perfect results.

The overall setting of the garden should always be right for the location, not the other way around.

The stones should be placed first, next the trees, and then the shrubs.

Get used to the concepts of shin, gyo, and so. This is of great help to start working on the garden.

Have in mind that the real Japanese gardens are the traditional ones in Japan. What we can do in America is to shape a garden in the Japanese style. Rikyu once said about the perfect Roji: “Thick green moss, all pure and sunny warm”. In other words, techniques are not as important as the feeling you evoke in your garden. Said in other way, the feeling is more important than techniques.

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In order to accomplish its mission and the IIID has established a two tired hierarchy to maintain close contact with all the members spread over its chapters and centres.
An Executive Committee at the Head Quarters in Mumbai and a Managing Committee at each Chapter/Centre is elected biannually from its core members.

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