Inheritance Tax - Business Property Relief

Types of property that currently qualifies

Inheritance tax (IHT) legislation (IHTA 1984) provides relief for certain types of business or business property included in either a lifetime transfer or the deceased’s death estate. Relief is available for business property anywhere in the world.

For deaths and transfers, on or after 6 April 1996, the categories of property which are capable of qualifying as relevant business property are broadly as follows with rate of relief:

• Property consisting of a business or interest in a business: 100% relief
  
• Control holdings of unquoted securities in a company: 100% relief
  
• Unquoted shares in a company: 100% relief 
• Control holdings of quoted shares in a company: 50% relief 
• Land, buildings, machinery or plant used by a company controlled by the transferor or by a partnership of which the transferor was a member: 50% relief 
• Settled land, buildings, machinery or plant in which the transferor had an interest in possession and used in his business (This applies to lifetime transfers only): 50% relief

All statutory references are to IHTA 1984.

Reforms - Agricultural Property Relief and Business Property Relief

From 6 April 2026, the government is introducing key changes to BPR and APR.

• A £1 million cap will apply to the total value of property that can receive 100% BPR or APR.
• If the combined value of qualifying property is £1 million or less, it will still receive 100% relief—so no IHT is due.
• If the value exceeds £1 million, the excess will only qualify for 50% relief. Not that the rate itself changes after £1 million—it’s the relief applied to the excess that changes.

Therefore, although the 100% rate of relief is continuing for the first £1 million of combined agricultural and business property it will be 50% thereafter.

The allowance will cover £1m of property qualifying for BPR, or (say) a combined £400,000 of APR and £600,000 BPR qualifying for 100% relief. If the total value of the qualifying property to which 100% relief applies is more than £1m, the allowance will be applied proportionately across the qualifying property.

Also, the government is reducing the rate of BPR available from 100% to 50% for shares admitted to trading on a recognised stock exchange which are not ‘listed’.

Reforms - Trusts

Trustees of discretionary trusts are liable to an IHT charge of up to 6% of the value of property held in a trust every 10 years. There may also be an exit charge when property leaves the trust. APR and BPR can apply to property in trust. There will be a combined £1m million allowance for trustees on the value of qualifying property to which 100% relief applies, on each ten-year anniversary charge and exit charge, consistent with the treatment of qualifying property chargeable to IHT on death.

Settlors may have set up more than one trust comprising qualifying business property and/or agricultural property before 30 October 2024 (2024 Autumn Budget date). In which case, from 6 April 2026, each trust would have a £1m allowance for 100% relief. The government are though introducing rules to ensure that the allowance is divided between these trusts where a settlor sets up multiple trusts on or after 30 October 2024.

A technical consultation regarding the reforms in relation to trusts ran from 27 February 2025 to 23 April 2025. Stakeholders were invited to respond to 9 consultation questions. A summary of responses  was published on 21 July 2025. Nothing dramatic arose from the consultation but the government has made the following changes to the original policy design.

Reforms - transfers made on or after 6 April 2026 - individuals

For individuals, there will be a £1 million allowance on the combined value of agricultural or business property in an individual’s estate which qualifies for 100% relief, including property transferred on death, any PETs and chargeable lifetime transfers made in the 7 years before death, and any immediately chargeable lifetime transfers such as property settled into a discretionary  trust.

This will refresh every 7 years on a rolling basis in a similar way to how the NRB applies to lifetime charges and chargeable transfers on death. (See HMRC case study 2 in Annex A)

PETs made on or after 6 April 2026 will be subject to the £1 million allowance if the transferor dies within 7 years. (See HMRC case study 3 in  Annex A).

The £1 million allowance will apply across the whole estate, so where there is qualifying agricultural and business property in more than one component of the estate (for example, a QIIP trust, the £1 million allowance will be apportioned across all the qualifying property (See case study 4 in Annex A). A QIIP trust refers to a trust where a beneficiary has a Qualifying Interest in Possession in the settled property. This means the beneficiary is entitled to the income from the trust as it arises, or has the right to enjoy the property immediately.

Where the total combined value of qualifying agricultural and business property is more than £1 million, the £1 million allowance will be allocated on a chronological basis, starting with the earliest chargeable transfer to which these rules apply, including failed PETs (see case study 5 in Annex A).

Reforms - Transfers made on or after 6 April 2026 - trustees

For trustees, there will be a £1 million allowance on the combined value of agricultural or business property settled into a relevant property trust which qualifies for the 100% rate of relief, to be applied on each 10-year anniversary charge and exit charge. Trusts with a combined value of more than £1 million of qualifying agricultural and business property will receive 100% relief against ongoing trust charges up to a value of £1 million, and 50% relief thereafter.

The £1 million allowance will refresh every 10 years, so that qualifying agricultural and business property held in that trust benefits from 100% relief up to a value of £1 million on each 10-year anniversary charge. The £1 million allowance will also apply to qualifying agricultural and business property which is subject to an exit charge. If there are multiple exits during a 10-year period, then the relief is applied cumulatively.

Note that the rate of tax on distributions of property will be treated consistently for IHT purposes regardless of whether they fall before or after the first 10 year anniversary charge. These measures are not explored in this article and fall under the “standardisation of exit charges before and after the first 10 year anniversary charge.”

Reforms - transitional provision for trusts and transfers made before 6 April 2026 - transfers made before 30 October 2024

PETs and CLTs made before 30 October 2024 will not be affected by the announced changes and will be subject to the rules in place at the time they were made. They will not be brought into cumulation for the purposes of determining the £1 million allowance.

Qualifying agricultural and business property settled into a relevant property trust before 30 October 2024 will be brought into the new regime on the trust’s next 10-year anniversary charge which falls on or after 6 April 2026.

Any qualifying agricultural or business property settled before 30 October 2024 which exits the trust will continue to attract unlimited 100% relief on IHT exit charges until the date of the trust’s next 10-year anniversary which falls on or after 6 April 2026. Such exits will not reduce the £1 million allowance available at the next 10-year anniversary. 

Reforms - Transitional provision for trusts and transfers made before 6 April 2026 - transfers made on or after 30 October 2024 and before 6 April 2026 (the transitional period)

The £1 million allowance for individuals will apply to lifetime transfers made on or after 30 October 2024 if the donor dies on or after 6 April 2026.

The new 50% rate will also apply to any PETs or CLTs of shares traded on but not listed on the markets of recognised stock exchanges, made during the transitional period and within 7 years of death where the death is on or after 6 April 2026.

If the transferor makes any PETs during the transitional period and dies before 6 April 2026, the new rules do not apply to the PETs or to any qualifying agricultural and business property in the estate on death and they will be subject to the rules which were in place at the time.

The £1 million lifetime allowance for individual settlors will not apply to 20% entry charges on qualifying agricultural and business property settled into trust during the transitional period, provided that the settlor lives for 7 years after the transfer. Where the settlor survives the transfer by at least 7 years such a chargeable transfer will not be brought into cumulation for the purposes of determining the availability of the £1 million allowance for future chargeable transfers of qualifying property.

However, if the settlor dies on or after 6 April 2026 and within 7 years of making the transfer:

• the value of any property transferred into trust during the 7 years before death will be subject to an Inheritance Tax charge at 40% in the same way as a failed PET
• the settlor’s £1 million allowance will apply to these transfers of qualifying agricultural or business property and will reduce the allowance available on any later chargeable lifetime transfers or on death

The trustees’ £1 million allowance will not apply to exit charges for any qualifying agricultural or business property which has been settled into trust on or after 30 October 2024, and subsequently exits the settlement before 6 April 2026. Any such exits will receive 100% relief from exit charges and will not reduce the value of the trustee’s £1 million allowance at the next 10-year anniversary charge. For exits after 5 April 2026 the £1 million allowance will apply and the value of the trustee’s £1 million allowance at the next 10-year anniversary charge will be reduced accordingly.

When calculating the first 10-year anniversary charge after 6 April 2026 for qualifying agricultural property and business property settled into trust during the transitional period, the trustees’ £1 million allowance will only apply to complete quarters which fall on or after 6 April 2026.

Reforms - single £1 million allowance for multiple trusts by the same settlor

Where a settlor has transferred qualifying agricultural or business property into multiple settlements on or after 30 October 2024, there will be a single £1 million allowance for 100% relief against ongoing relevant property trust charges. This will be allocated in chronological order, with priority given to the first settlement, then each successive settlement in order until £1 million of qualifying property has been settled and the entire £1 million allowance for 100% relief has been allocated to the trustees. The allocation of the single £1 million allowance applicable to each trust will apply for the lifetime of the trust.

For example, if £1 million of qualifying agricultural or business property is added to the first in a series of trusts, 100% relief will apply against ongoing trust charges in relation to that trust and will refresh every 10 years. But as the full £1 million allowance has been used-up by the first trust, the rate of relief on any relievable property added to a second trust, or any subsequent trusts will be limited to 50%.

The above rules will not apply to pre-existing trusts that contained qualifying agricultural or business property as at 29 October 2024. Such trusts will each benefit from the £1 million allowance from 6 April 2026 even if the settlor transfers further qualifying agricultural or business property to more than one of these trusts.

Reforms - APR and BPR - next steps

The government published draft legislation to implement the reforms to APR and BPR as part of the Finance Bill 2025/26. This legislation was released on 21 July 2025, and at the time of writing a technical consultation is underway, running for 8 weeks and closing on 15 September 2025.

The ownership test and lifetime transfers

The general rule is that property does not qualify for business property relief unless it was owned by the transferor throughout the two years immediately preceding the transfer (S106). The nature of the business carried on needn’t be the same throughout the two-year period, but there must have been a business throughout that period.

The general rule is relaxed in three situations:

• Where the transferor became entitled to the property on the death of another person
  
  
• Where the transferred property replaced other business property
  
  
• Where the transferred property had been acquired on an earlier transfer within the two year period

Where the deceased / transferor became entitled to property on the death of another person, he / she is treated as having owned it from the date of the other person's death (S108(a)). Where the deceased / transferor became entitled to property on the death of their spouse or civil partner, he / she ‘inherits’ the ownership period of the spouse or civil partner irrespective of how long they had been married (S108(b)).

‘Ownership’ means:

• Legal ownership by trustees where there is no interest in possession,
  
  
• In all other cases, beneficial entitlement including entitlement to trust property in which the deceased/transferor had a beneficial interest in possession

Lifetime transfers – additional conditions

Consider:

• A failed potentially exempt transfer (PET) that would have qualified for business property relief at the time it was made; or
  
  
• An immediately chargeable lifetime transfer (CLT) which did then qualify for business property relief

In these circumstances, there are additional conditions (S113A & 113B) for deciding whether business property relief is due where the transferor dies within seven years. These conditions are designed to deny business property relief in connection with charges arising on the transferor’s death if, broadly, the recipient has disposed of the property without replacement or, if it no longer qualifies.

The conditions therefore affect the value transferred by a PET, and the additional tax payable on a CLT if the transferor dies within seven years.

The rate of relief (100% or 50%) and the value on which it is given are determined by reference to the original gift and the position at that time. If the rate of relief has changed, then the rate at date of death applies.

The conditions to be satisfied are that the original property must:

• Have been owned by the recipient from date of the transfer to death of the transferor (or earlier death of the recipient)
  
  
• Still be relevant business property immediately before the death of the transferor (or earlier death of the recipient)

If the recipient has replaced the gifted property with other business property then that is allowable.

If the conditions are only satisfied in relation to a part of the gifted property, then there needs to be a proportionate reduction. For example, James made a PET of £200,000 comprising shares in a private trading company to Karen. Before he dies, Karen sells one half of the holding for £40,000. Business property relief is available on £100,000. 

Where the conditions are not satisfied at all, the consequences depend on whether the transfer is a failed PET or a CLT. With a failed PET, the value transferred by the PET is ascertained on the basis of no business property relief. With a CLT, the additional tax chargeable on death is calculated on the basis of no business property relief.

Investment businesses

Business property relief is not due where the business, or the business carried on by the company, consists wholly or mainly of:

• Dealing in securities, stocks and shares
  
  
• Dealing in land or buildings, or
  
  
• Making or holding of investments.

These types of businesses are not relevant business property and so do not attract business property relief. It should be noted however that this exclusion does not generally apply to shares in a holding company. In other words, shares in a holding company which owns share in a trading subsidiary would, in principle, benefit from business property relief.

Moreover, relief is not denied for shares in a genuine building and construction company holding a number of properties as stock. It is important to consider the nature of the business at the time of the transfer (a business which started as a house builder but at the time of the transfer had not recently built any houses and was selling off its land bank wouldn’t qualify for business property relief).

Businesses concerned with caravan sites, furnished lettings, furnished holiday lettings, and commercial letting can be particularly problematic. The two tests that need to be applied are:

• Whether the activities carried on constitute a business (S105(1)(a)), and
  
  
• If they do, is business property relief precluded because that business was one of ‘wholly or mainly holding investments’?(S105(3)).

The phrase ‘wholly or mainly’ doesn’t simply refer to the income, or the capital or the activities of the business. All aspects of the business must be considered. In deciding whether a business falls within S105(3), consideration will be given to preponderant activities, assets and sources of income or gains at the time of the transfer and over a reasonable period leading up to it. Each company has to be looked at in the round. HMRC does however state:

"It may however be readily accepted that, where the majority of both the tangible asset value and profit of the company is attributable to trading activities, relief is available." [Shares & Assets valuations Manual SVM111150]

Liabilities to acquire business property

It’s no longer possible to reduce the value of an estate for IHT purposes by securing a loan on it where the loan is then used to acquire property qualifying for business property relief (S162B(1)).

Where money is borrowed to acquire assets qualifying for business property relief, then the liability firstly reduces the value of the assets that qualify for relief. This is the case even if the liability is actually secured against other assets in view. Business property relief is then given against the net value of the asset after deduction of the liability. Any remaining value of the liability may then be set against any other assets that are chargeable to tax, as long as the deduction is allowed (S175A).

Gordon borrows £450,000 secured against his house and uses these funds to acquire private company shares. When he dies five years later, the shares are worth £575,000 and qualify for business property relief. The rest of his estate is worth £1.5m. At the date of death the liability is taken to reduce the value of the private shares that can qualify for business property relief from £575,000 to £125,000. Business property relief applies to that value.

The total estate, including the private shares is £2,075,000 (£1.5m plus £575,000).

This is reduced by business property relief of £125,000 and the liability of £450,000.

The value of the chargeable estate is £1.5m.

Excepted assets (including ‘surplus cash’)

S112 prevents taxpayers from getting the benefit of business property relief for private assets by confining the relief to assets needed for the business.

The value of any ‘excepted assets’ is ignored for the purposes of business property relief. For an asset to avoid being ‘excepted’ it must pass one of two tests which are broadly as follows:

• It must have been used wholly or mainly for the purposes of the business in question, or
  
  
• It must be required at the time of the transfer of value for future use for the purposes of the business in question.

An asset used wholly or mainly for the personal benefit of the transferor (or of a connected person) would not be an asset “used wholly or mainly for the purposes of the business”.

The ‘future use’ test was considered in Barclays Bank Trust Co Ltd v CIR SpC 158.

A lady died holding half the shares in a company. Her husband held the other half. The company’s trade was the sale of bathroom and kitchen fittings, mainly to ‘trade’ customers.

The company‘s turnover at the time of the lady‘s death was approximately £600,000. It held £450,000 in ‘cash’ invested for periods of up to 30 days. HMRC accepted that the company needed £150,000 but determined that £300,000 was an ‘excepted’ asset.

The Special Commissioner posed the question as follows, at para. 10 of his decision:

''Was the £300,000 cash held by the company required on 23 November 1990 for future use for the purposes of the business? This is a question of fact and on the evidence before me I cannot find that it was so required. I do not accept that ‘future’ means at any time in the future nor that ‘was required’ includes the possibility that the money might be required should an opportunity arise to make use of the money in two, three or seven years’ time for the purposes of the business. In my opinion and I so hold that ‘required’ implies some imperative that the money will fall to be used upon a given project or for some palpable business purpose.''

Two points are relevant:

• Only the value of excepted assets is left out – the remaining value (assets) get business property relief (assuming the conditions are satisfied)
  
  
• Cash can be as much an ‘excepted asset’ as, for example, an insurance bond. In other words, switching from cash to a bond (or vice versa) should have no effect on availability of business property relief.

In January 2014, the Institute of Charted Accountants in England & Wales (ICAEW) issued a Technical Release containing guidance agreed with HMRC regarding surplus cash.

The ICAEW reflected that many businesses within the UK are retaining increased cash buffers in case of any further downturn in trade, and accordingly confirmation was sought from HMRC if it would look favourably on surplus cash held in this regard. The response of HMRC was as follows:

''We understand that due to the financial circumstances in which business find themselves, they may choose to hold more cash in case of a potential downturn in trade. We can also confirm that in recent times we have seen this on a more frequent basis where businesses hold cash in excess of what they would traditionally require.

However, our guidance remains the same, and unless there is evidence which directs us to the fact that the cash is held for an identifiable future purpose, then it is likely it will be treated as an excepted asset. Therefore the holding of funds as an 'excess buffer' to weather the economic climate is not a sufficient reason for it not to be classed as an excepted asset''

The rule excluding excepted assets is relaxed in the case of land or a building where only part is used exclusively for the purposes of the business. In these circumstances an apportionment takes place between the two parts (S112(4)). For example, apportionment would take place where the deceased owned a three-storey building but only used the ground floor as a shop. Where a mortgage is secured on the property, then unless it is secured on a particular part of the building it should be apportioned rateably between the relevant parts.