If you own a business, or an interest in a business, your estate may be entitled to relief from Inheritance Tax. Business Property Relief (BPR) provides relief from Inheritance Tax (IHT) on the transfer of relevant business assets at a rate of 50% or 100%.
Business Property Relief and IHT
Inheritance Tax is the tax paid on your estate after you have passed away. Your estate consists of everything you own. Every person in the UK currently has an IHT allowance of £325,000 – this is known as the nil-rate band (NRB). If the value of your estate is higher than this figure, you will need to pay IHT on the excess.
With Business Property Relief, qualifying business assets from IHT either while you are still alive or upon your death. This form of tax relief reduces the value of a business or business assets in the calculation of your IHT liability.
2-year ownership rule
BPR is subject to various conditions and restrictions. For example, the relevant property must be held for at least two years before your death in order to qualify for relief.
So, if you pass away shortly after acquiring the asset, your estate won’t be eligible for the relief. The exception here is if you inherit the asset from your spouse, who also owned it for less than two years. In this scenario, your period of ownership is added to that of your late spouse. If the combined period of ownership exceeds two years, you will be eligible for BPR relief.
Not every business or interest in a business qualifies for Business Property Relief. Typically, BPR is available for:
- A qualifying trading business or an interest in one
- Shares in an unlisted qualifying company, including a minority holding
- Shares in a qualifying company listed on the Alternative Investment Market (AIM) of the London Stock Exchange
Note that if the business mainly deals in securities, stocks, land, or buildings, or in the making or holding of investments, it will not be eligible for Business Property Relief. As such, BPR is not available to buy-to-let investors. Buy-to-let businesses are treated as investment businesses.
Relevant business property comprises of:
|Type||Rate of relief|
|A business or an interest in a business.||100%|
|Unquoted shares, including shares listed on the Alternative Investment Market (AIM)||100%|
|Unquoted securities which on their own or combined with other unquoted shares or securities give control of an unquoted company||100%|
|Quoted shares which give control of the company||50%|
|Land or buildings, machinery or plant used wholly or mainly for the purposes of the business carried on by a company or partnership||50%|
|Land or buildings, machinery or plant available under a life interest and used in a business carried on by the beneficiary||50%|
How to claim BPR relief
Business Property Relief can be claimed by the executor of your will or the administrator of your estate when valuing the estate.
Two forms need to be completed. These include:
- Form IHT400 (Inheritance Tax account)
- Schedule IHT413 (Business or partnership interests and assets)
Bear in mind that HMRC assesses BPR when the estate makes a claim after you have died. Entitlement to the relief will depend on your business assets maintaining their BPR-qualifying status such that they qualify at that time.
Using Business Property Relief for estate planning
Business Property Relief can play a key role in Inheritance Tax planning even if you don’t own your own business. Investing in a qualifying business can be an effective way of reducing your IHT bill.
For example, if you’re not keen to give away large sums of money during your lifetime in order to reduce your IHT liability, an investment in a BPR-qualifying investment could be another IHT strategy to consider. This strategy can provide you with greater control over your money. Unlike with a gift, you retain ownership of your money.
Another situation where BPR can be effective from an IHT planning point of view is where you’d like your wealth to become exempt from IHT quickly. Unlike gifts and trusts, which generally take seven years before they’re fully exempt from IHT, BPR-qualifying investments are exempt from IHT after just two years, provided they have been held for at least two years at the time of death.
An investment in a BPR-qualifying business could also be an effective strategy if you want to give the inheritance you plan to leave behind the opportunity to grow. A BPR-qualifying investment usually has the potential to increase in value. However, as with any investment, there are no guarantees.
Business Property Relief risks
There are many common issues and pitfalls, which could result in a loss of BPR. The following list is by no means exhaustive, and the BPR requirements should be considered carefully in every case.
100% BPR is given for the transfer of the business as a whole. There is no BPR given for the transfer of land or buildings, machinery or plant used wholly or mainly for the purposes of a sole trader business, except in certain circumstances.
No BPR is given on a loan made to a partnership following retirement. 100% relief is given for an interest in a partnership, compared to 50% for property held personally and lent to (used by) a partnership.
The IHT laws in Scotland may mean the position is slightly different.
No BPR is given in respect of loans made to a company, such as a credit balance on a directors’ loan account.
Property which is owned by a shareholder and used by the company will only qualify for 50% BPR and this is subject to certain conditions.
BPR is not available in respect of a business, or shares in a company that is, not carried on for gain (not for profit or not on a commercial basis), or subject to a contract for sale or being wound up.
There is no BPR if the business or company is one of “wholly or mainly” in dealing in securities, stocks or shares, land or buildings or in the making or holding of investments.
A business which only generates investment income will not attract BPR, so this excludes:
- A residential or commercial property letting business
- A property dealing businesses
- A serviced office business
Some business activities are borderline. Whether they will qualify for relief depends on the nature of services provided, typically these include:
- Holiday businesses
- Property development
- Various other land-related activities
Certain activities are regarded as trading:
- Farming (this is covered by Agricultural property relief)
- Woodland management
- Sporting; shooting and fishing
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert legal or other advice should be sought.