IHT and business property relief – still a relief, just not as much…
One of the most significant announcements in the recent Budget only got a brief mention in the speech, but the changes to Inheritance Tax (“IHT”) Business Property Relief (“BPR”) have the potential to be the most far reaching for many business owners.
Isn’t Business Property Relief all about Farmers?
Given the press coverage since the budget you would be forgiven that the only people affected by the Budget changes are farmers but a much broader group of business owners will see big changes to their IHT position come April 2026.
There is a window of opportunity to make changes to pre-empt this but time is marching on!
So what is business property relief?
At the most basic level, BPR currently provides relief from Inheritance Tax for “relevant business property” – the rate of relief depending on the type of property we are talking about.
Relevant business property falls into a few categories, the main ones being:
- A business or an interest in a business – so essentially a sole trade business or a share in a partnership (100% relief)
- Shares in an unquoted company (100% relief)
- Land, buildings, machinery or plant owned by an individual but used in their partnership business or a company they control – for example a building owned by a shareholder which is used in the trade of their 100% owned company
- NB these physical assets only attract 50% relief as opposed to 100%!
Are there any restrictions to claiming business property relief?
Unfortunately yes!
Firstly, the ‘property’ has to be held for at least two years before it qualifies for relief, although this can be shorter in some circumstances (for example where the property is replacing other qualifying property).
Beyond this, the main restriction is that the business (or company) concerned must be ‘wholly or mainly trading’ to qualify.
This is a “more than 50%” test – measured across a number of factors including turnover, profit, asset value, management time and number of employees.
No single factor is decisive so you must consider all of them and take a view “on balance.”
What else do I need to consider in terms of claiming business property relief?
Business Property relief is an ‘all or nothing’ relief
In other words, you either get relief on 100% of the value or no relief at all.
So, for example, if a company has both a trade and some investment assets, provided the trading activity makes up more than 50% on balance across those factors then BPR will apply to the full value of the shares.
If the trading activity falls below the 50% then none of the value will qualify for BPR.
Given the variety of factors, it is not always easy to be definitive so documenting the position and taking the right advice is key.
Excepted Assets can be excluded from Business Property Relief
Meaning, that if there are assets in a company which are not used in the business in any way (surplus cash is the most common) then this can be considered an “excepted asset” and can be subject to IHT with no BPR even if the shares as a whole qualify.
For example, if a company is valued at £10 million and qualifies for BPR, but has surplus cash of £2 million not required in the business then the £2 million cash will still attract IHT at 40%.
If the company has large cash balances then being able to show how these are required in the business is key to supporting a full BPR claim.
There are a couple of other niche restrictions in terms of claiming Business Property Relief:
- If the business or company is subject to a binding contract for sale when the owner dies, then BPR is not available.
- This will be very rare of course but some poorly drafted shareholders agreements can trip people up here where shares have to be sold to the other party on death.
- Companies which are being wound up at the time of death also do not attract BPR except in limited circumstances
- Again, likely to be a rare situation, but it does happen.
What about groups of companies – how does business property relief apply?
Without special provisions then shares in a holding company of a group would potentially not qualify as its business would be the holding of shares in other companies and not trading in its own right.
The rules do however allow BPR to be claimed on a holding company where it holds companies which in themselves would qualify for BPR which is a very useful extension!
It is really important to look at each group company individually as there are a couple of quirks here which can be traps for the unwary!
- The group rules refer to subsidiaries – which HMRC consider to be a company that the holding company controls.
- In HMRC’s view interests of 50% or less would be seen as an investment with no possibility of qualifying for BPR
- If one the group companies is an investment business then this would also be excluded from qualifying for BPR.
- If this investment business holds property which is let to the group members for trading this would generally be fine, but if it holds property which is let to third parties then it might fall foul of this rule and the value would be excluded from qualifying for BPR. Again, take advice from a specialist!
How does business property relief work on gifts?
If someone gifts a BPR asset to another individual then the gift is a potentially exempt transfer (“PET”) for IHT purposes so there would be no immediate effect (although don’t forget there could also be CGT consequences!).
If the person making the gift survives seven years after the gift is made, then the gift is outside of their estate for IHT purposes so again the BPR question is not really relevant.
Where it makes a difference is if the person making the gift passes away within that seven year window.
For a normal PET the value of the gift comes back into the person’s estate for IHT and will be subject to IHT on that value (subject to their nil rate band and the tapering rules).
However, if a BPR gift were to come back into the estate in these circumstances the value can still be nil (or 50%) for IHT purposes so no IHT consequences.
However, the point that is often overlooked is that, for BPR to apply to the gift in this way the person who received the gift must still own the property at the time the person who made the gift dies, AND the property must still qualify for BPR at that time as well (although the two year rule is not applicable here and the BPR condition is relaxed for unquoted shares).
If these conditions are not met, then the original gift loses its BPR and comes back into the estate at its value at the time of the original gift.
To use an example:
- John gifts his shares in his trading company to his daughter Jane at a time when they are worth £3 million.
- John dies four years later and Jane still owns the shares at that time
- BPR can still apply to the original gift 😀
- However, if Jane had sold the shares before John died then his claim to BPR on the original gift fails and the £3 million value comes back into his estate for IHT purposes. ☹️
What about putting business property into trusts?
If a person transfers property into a discretionary trust, then generally if the value of the transfer is more than their remaining IHT nil rate band they will pay IHT on the excess at 20%.
If they then die within seven years of the transfer, then the IHT on the transfer will be topped up to the appropriate death rate of IHT.
The same rules apply to the transfer of BPR property into a trust, except that assuming the property attracts full business property relief there will be no lifetime IHT and, assuming the ownership and BPR conditions are met by the trust there will be no additional IHT on death within seven years.
The BPR status is also taken into account when looking at 10 year and exit charges for the trust.
If the trust no longer owns the BPR property at the time of death, then there is still an additional IHT charge on the original transfer.
Business property relief seems really complicated – and now you tell me it is changing?
Business property relief IS very complicated!
And it is about to get even more so.
In the Budget on 30 October 2024, the Chancellor announced that the benefit of BPR is going to be reduced.
We don’t have full details yet, but the broad thrust of the changes is that each person will have an “allowance” of £1 million combined between BPR and Agricultural Property Relief (watch this space for an article on APR soon!).
From 6 April 2026, BPR and APR property up to a value of £1 million will be 100% outside of the IHT net.
However, value in excess of that amount will only receive 50% IHT relief, with the other 50% being taxed at 40% on death – so in effect a tax rate of 20% on the value of the BPR & APR property over £1 million!
Importantly the current expectation is that the £1 million business property relief allowance will not be transferable between spouses, unlike the main IHT nil rate band.
What do these changes to business property relief mean practically?
Clearly this represents a really significant change and will mean many estates which were not expecting to pay IHT will now be having to find money to pay the tax.
The positive aspect is that it will be possible to ask to pay the IHT by instalments over a ten-year period – and in some cases provided the instalments are paid on time there will not even by any interest.
This at least eases cashflow concerns to a certain extent.
Gifts of BPR/APR property transacted before the 2024 Budget look like they will remain under the old rules.
Gifts made after this date but before 6 April 2026 will be under the old rules until that date but under the new rules after – so if the donor dies within seven years AND after 5 April 2026 the new rules will apply to the gift (with tapering where appropriate).
These rules will also apply to trusts:
Gifts of BPR or APR property to trusts after 5 April 2026 will be subject to lifetime IHT at an effective rate of 10% of the value over £1 million.
As we understand it at the moment each trust formed before Budget Day will have a £1 million allowance, while trusts formed after the Budget will only have a share of £1 million depending on how many trusts there are.
These means that trusts which only hold BPR or APR property may now have to pay ten year and exit charges on the value of their property over their share of the BPR/APR allowance.
So what should I be doing now to get ready for changes to Business Property Relief?
At this stage there is much about the new rules which we don’t know.
There is to be a consultation early in 2025 and we would hope to see draft legislation soon after that.
However, there is likely to be a window of opportunity between now and April 2026 to make gifts to at least start the seven-year clock ticking.
Gifts to trusts may also be attractive before the new rules kick in as the value that can be transferred will not be limited to £1 million before lifetime IHT applies.
So, there is a balance to be struck between acting quickly and being aware that much may change between now and when the rules come into force.
As a minimum if you are likely to be affected by the changes then understanding what your options might be now will be sensible, but the wise move may then be to wait until before we know the full details of the rules before taking any action.
As ever, if you have any questions about this or indeed other tax matters, please do contact the IN Accountancy Tax team who will be happy to help you.
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