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Markel Tax

26 May 2020

Covid19 – are we still trading?

If an individual disposes of their trading business, there are two reliefs that could reduce the tax liability. These are Business Property Relief (BPR) for Inheritance Tax (IHT) and Business Asset Disposal Relief (BADR) for Capital Gains Tax (CGT).

If the conditions for BPR are met, 100% relief from IHT liability could be available. For BADR, the individual may be liable to pay CGT at the lower rate of 10%.

However, in order to qualify the business must meet the ‘trading’ test for tax purposes in both cases. This test is subtly different for BPR and BADR.

If the test is not met, BPR and BADR are unlikely to be available to mitigate tax liabilities.

There is a real risk that if this lockdown continues, or if there is a second or third wave of the Coronavirus resulting in businesses having to cease trading again, a business which currently qualifies for BPR and BADR could cease to do so in the near future.

What constitutes a trade for BPR?

To qualify for BPR, one of the conditions that must be met is that the business activity carried on must not be ‘wholly or mainly’ of making or holding investments.

There is no legal definition of ‘wholly or mainly’ but case law determines this to be more than 50%. But 50% of what?

In the Farmer case, it was concluded that five factors must be considered ‘in the round’. These are:

  1. The overall context of the business

  2. The capital employed in the business

  3. The time spent by employees in making the business function

  4. The turnover

  5. The profit

How could Coronavirus affect BPR?

For a business which is wholly a trading business, this should not be an issue. However, where you have a mixed trading and investment business, the lack of trade activities could tip the scales to such an extent that the business becomes mainly an investment business and, therefore, could cease to qualify for BPR.

Businesses that find themselves in a situation where workers are being furloughed could, as a consequence, see a reduction of the time spent by employees in the trading business.

If the business has had to reduce or cease its trading function, it may find that the turnover and profits are less and as a result the investment arm of the business dominates.

During the pandemic, it is no secret that there has been a reduction in the value of assets and this may be reflected in your businesses assets. The capital value of the trading assets of the business could decrease and the investment assets may become more than 50% by value. This needs to be weighed against the likelihood that the capital value of the investment assets has also decreased, therefore, not affecting the trade and investment proportions to a material degree.

No single factor dominates and it is important to look at all of these factors as a whole to determine whether or not BPR is available.

Furthermore, during this economic downturn, businesses may be tempted to hold cash buffers in excess of their normal working capital. HMRC is known to take the view that excess cash held for no business purpose is an excepted asset which could restrict or deny BPR altogether. This could impact on businesses that were previously wholly trading but have had to lockdown; with changes to trading income and expenditure, working capital requirements will also have changed. It will be important to understand the changed requirements to refute HMRC claims that excess cash is being held without a business requirement – this thinking should be done now and documented where possible.                             

What constitutes a trade for BADR?

To qualify for BADR, one of the conditions that must be met is that the business carried on must not include, to a ‘substantial’ extent, activities other than trading activities.

There is no legal definition of ‘substantial’ but HMRC guidance adopted in case law determines this to be more than 20%, a considerably lower test than for BDR.

Although both HMRC guidance and case law refer to the same Farmer case as BPR, the factors that must be considered ‘in the round’ are listed slightly differently as follows:

  1. The history of the business

  2. The asset base of the business

  3. The expenses incurred or the time spent by employees in making the business function

  4. The turnover and other income

In considering the asset base of the business HMRC guidance is to look at the gross assets of the business.

How could coronavirus affect BADR?

The same concerns around a reduction in the level of trading activity affect BADR as they do BPR, but for BADR the level of non-trading activity only needs to reach the lower hurdle of 20% for the business to cease to qualify as a trading business for BADR.

Where a business already has a mix of trading and investment activities, the margins for some of the measures considered in the Farmer case may be much smaller for BADR than for BPR, and the business may cease to qualify.

However, BADR continues to apply for a period of time after the trading status of a business has ceased, and in some cases this may offer mitigation against the impact of Coronavirus. The overall context of the business also needs to be considered for both BADR and BPR, and perhaps in these exceptional times, HMRC and the courts would give more weight to the position immediately prior to the outbreak.


Prior to Coronavirus, various discussions took place about reforming IHT and, in particular, there was speculation as to whether or not BPR would be scrapped altogether. There was similar speculation around BADR and changes to this relief were made at the last budget, including renaming the relief which had previously been known as Entrepreneurs’ Relief.

If you are considering passing your business to the next generation, or simply looking to sell or close your business, it may be worth reviewing your business now and taking steps to secure these reliefs before it’s too late.

Our COVID-19 Hub contains a range of information and resources to best support our clients during this difficult time. To receive the latest news and insights by email sign-up here.

Tagged Incentives and Reliefs IHT trust & estate planning Tax for entrepreneurs and corporates COVID-19
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