ACCA Advanced Taxation (ATX) Practice Exam

What is the effect of Business Relief (BR) on the inheritance tax calculation?

1. It increases the total value of the estate

2. It may reduce the value of business assets for tax purposes

3. It does not affect cash holdings

4. It applies only to residential properties

The correct answer is: It may reduce the value of business assets for tax purposes

Business Relief (BR) plays a significant role in reducing the inheritance tax liability on business assets when an individual passes away. Specifically, BR allows certain business assets to be valued at a reduced amount for inheritance tax purposes, which means that their taxable value is lowered. This leads to a direct reduction in the inheritance tax burden imposed on the estate. When BR is applied to qualifying business assets, it can allow for either a relief of 100% or 50% depending on whether the asset qualifies as a business as opposed to being simply an investment. By effectively lowering the value of those assets, BR is instrumental in ensuring that only a smaller portion of the estate is subject to inheritance tax, which provides a clear financial benefit to the heirs. In this context, while it's important to acknowledge that BR does not apply to all types of assets and specifically does not extend to cash holdings or residential properties, its primary function is to adjust the value of business assets for tax assessments. Therefore, the correct choice that reflects this is that Business Relief may reduce the value of business assets for tax purposes.