Business Property Relief
Business property relief can significantly reduce or eliminate inheritance tax on business assets. Many UK businesses could be eligible for up to 100% relief. Other strategies, such as lifetime gifting, may also be advantageous. It is common for Will Writers to work with accountants to ensure precise fulfilment of your needs.
Business relief (BR) reduces the inheritance tax on certain business assets. It allows family businesses to continue after death without needing to sell shares or the business to pay the inheritance tax. Governments recognise its importance in encouraging business investment.
The Budget 2024 implemented a few changes affecting BPR.
The Nil Rate Band and Residence Nil Rate Band will be frozen at their current values of £325,000 and £175,000, respectively, until April 2030. The taper threshold for the Residence Nil Rate Band will also remain at £2 million.
From April 2026, changes to agricultural property relief (APR) and business property relief (BPR) are to be implemented. The 100% relief rate will continue to apply to the first £1 million of combined agricultural and business assets. For assets above £1 million, the relief rate will be 50%. In addition, shares designated as “not listed” on the markets of a recognised stock exchange, such as AIM, will no longer qualify for the 100% rate of BPR and will instead qualify for 50%.
BR-qualifying AIM-listed shares in an individual savings account (ISA) are included (since 2013), thus improving tax efficiency.
Eligibility
To be eligible for Business Relief, a business must not be listed on a major stock exchange, rendering public limited companies generally ineligible. However, many private limited companies, limited liability partnerships, and sole traders or business interests may qualify for BR. Examples include:
- Shares in unquoted companies, even with a minority holding
- Shares in companies on the Alternative Investment Market (AIM)
- A family business passed down through generations
Sole traders are eligible for 100% Business Relief when transferring their entire business as a single entity. However, they do not qualify for Business Relief when transferring land, buildings, or machinery primarily used for business purposes.
Several criteria must be considered to qualify for business relief, including the nature of the business and the assets involved. It is advisable to consult with a specialist to navigate the complexities of this relief.
Gifts That “Waste” Business Property Relief
There are three particular circumstances where BPR could be “wasted”:
- Where BPR qualifying assets pass to a beneficiary who is exempt from IHT;
- Where BPR qualifying assets are split between exempt and non-exempt beneficiaries;
- Where gifts are made to spouses/civil partners, and BPR is lost between the first death and death of the survivor.
1. Gifts to Exempt Beneficiaries
The relief is effectively wasted on death if the business is specifically gifted to a spouse, civil partner or charity. A gift to a spouse, civil partner or charity is already exempt from IHT due to the spousal exemption and charitable exemption for IHT. Suppose there are other gifts to non-exempt beneficiaries in the will, such as children. In that case, BPR will not apply to those other assets as BPR only attaches to the business assets. In this type of circumstance, it may make more sense from an IHT perspective to make a gift of the BPR assets to the non-exempt beneficiaries, however noting that where there is a spouse/civil partner, a gift to the other beneficiaries may not be in their best interests as the survivor may need the business assets.
2. Gifts Between Exempt and Non-exempt Beneficiaries
Where business is shared between exempt and non-exempt beneficiaries, this could potentially increase the amount of IHT due. An example best illustrates this.
Say Mr Jones has a business qualifying for BPR at 100% worth £300,000 and other assets worth £700,000. His will gives his residuary estate 50% to a charity and 50% to his brother, there are no other gifts.
For IHT purposes, Mr Jones’ gross estate (before deduction of reliefs and exemptions) is £1,000,000. The charity and brother are each entitled to 50% of this (£500,000). For the business, each will be treated as inheriting 50%.
IHT on the charities share is nil due to the charitable exemption.
For the brother’s share of the estate, IHT will be calculated as follows:
The brother’s share of the estate (£500,000) minus BPR over his 50% of the business (£150,000) = £350,000.
£350,000 minus NRB (£325,000) = £25,000
£25,000 x 40% = £10,000
The BPR on the charity’s 50% of the business is wasted in this situation.
If Mr Jones’s will instead gifted the business to his brother, BPR could be fully utilised, reducing IHT on the estate to nil.
3. Gift to Spouse/Civil Partner
Another consideration when considering a gift of BPR assets to a spouse/civil partner is what happens on the death of the spouse/civil partner must also be considered. If a business qualifies for BPR at 100% on the second death, it will pass IHT free. But there is the possibility that by the time a second death occurs, BPR may not be available, for example:
- The survivor may not want to run their late spouse’s business;
- A business partner may want to buy the deceased’s shares from the survivor;
- The survivor may decide to run the business for a while but eventually sell it on in their old age to retire or
- The business could be run in such a way that BPR no longer qualifies at the date of death.
This would lead to an increased IHT liability, as an IHT-exempt asset (a qualifying business) is replaced by one subject to IHT (a non-qualifying business or cash) because BPR can no longer be applied.
To combat the relief being lost, a Business Property Relief Trust could be considered. This is a discretionary trust that takes all assets that qualify for BPR.
The trust is its own legal entity and will own the business rather than the surviving spouse/civil partner. Should the business be sold between the first and second death, the surviving spouse’s estate is unaffected as the trust owns the proceeds rather than the survivor.
A letter of wishes is usually drafted to state that the spouse is to be treated as the main beneficiary of the trust while they are still alive. Upon their death, the letter of wishes could either direct that the trust be wound up and assets distributed to the beneficiaries, or alternatively, it could continue to run if there is a need to protect assets for any of the beneficiaries.
Do I need a financial adviser to do this?
Inheritance tax can be complex, so seeking assistance from a financial adviser is advisable. If clients do not have their own, Fern Wills can introduce one to you. Trying to make your legacy tax efficient without expert help may not be effective and could lead to unintended consequences. A financial adviser working with your estate planner can clearly explain your options and develop a strategy to reduce your inheritance tax burden. Even if you don’t qualify for Business Relief (BR), they will work with you to find alternative solutions that help your beneficiaries retain as much of your assets as possible.
FAQs
Should I use a discretionary trust for business property relief?
It’s wise to establish a discretionary trust if there is a chance that the deceased’s spouse, beneficiary or business partner may not wish to manage the business. If the business is sold, the cash from the sale will be released, resulting in it no longer qualifying for Business Relief (BR). However, by setting up a discretionary trust to legally own the assets and their proceeds, the assets will remain eligible for BR, regardless of whether the business or its assets are sold.
Is there a spouse exemption?
If your spouse has listed you as the sole beneficiary in their Will, you can generally inherit their assets without paying taxes. Additionally, you can apply any unused portion of your partner’s nil-rate band (the tax-free allowance for inheritance gifts) to your estate. This means you currently have a total tax-free allowance of up to £650,000 to pass on to your designated beneficiaries.
How long does the business need to own the property before it can qualify?
A business can benefit from business property relief after owning a property for two years. You don't need to have used the land or property for the same business; it’s sufficient to show that the space was used for any business purpose. However, three exemptions may allow you to claim the relief regardless of how long you have owned the property.
- If the person transferring the property inherited it following another person’s death
- If the transferred property replaced another business property
- If the transferred property was acquired as part of an earlier transfer within the two years
Other Considerations
Giving the BPR qualifying assets to a beneficiary that is not IHT exempt (such as a BPR trust) instead of a beneficiary that is IHT exempt (i.e. a spouse), HMRC will be forced to decide whether the business assets qualify for BPR. Suppose a spouse inherits or is treated as inheriting due to an Immediate Post Death Interest (IPDI) trust. In that case, HMRC does not need to make a decision on whether the business qualifies for BPR as the spousal exemption applies. Knowing whether the business qualifies can affect the planning that the spouse wishes to make in the future; for example, if the business did not qualify for the relief, they may want to undertake more lifetime planning than they would if the business did qualify.
