Business Property Relief

Business Property Relief is a valuable tax relief available to major shareholders and business owners of trading companies at the point of succession planning or death.

Many company directors believe they will be exempt from Inheritance Tax.

However, as businesses grow and expand, the simple trading business model, morphs and changes for valid commercial or personal reasons.   At these critical points, it is important to be aware of the implications for Inheritance Tax as your family could discover to its huge cost what you didn’t realise whilst you were alive.

There are almost always ways to ensure that your structure can work for your business whilst you are alive as well as for those you leave behind.

As ever, getting the right advice early on can avoid shocks when they are too late to remedy.

How we’ve helped:

  • We have helped a family business in the property development sector consider the benefits of using family monies to finance growth rather than rely on external debt.
  • We have improved the availability of BPR for a wealthy family in the services office sector by considering asset ownership structures and the inheritance tax efficiency of the alternatives.
  • We have advised on the impact of ownership of non-trading assets within the trading structure of a professional practice and provided solutions to identified tax inefficiencies in order to maximise availability of BPR.

 

Frequently Asked Questions post Autumn Budget 2024

My family business was completely exempt from IHT before the budget. How has my exposure to IHT changed? 

Before 30 October 2024, family trading businesses could qualify for 100% Business Property Relief (BPR) on an unlimited value, effectively exempting such businesses from inheritance tax (IHT). However, from 6 April 2026, the relief is limited: 

  • 100% BPR relief applies only to the first £1 million.

  • Any value exceeding £1 million will attract a reduced relief of 50%. 

This means estates with business interests exceeding £1 million face increased IHT exposure after 6 April 2026. If the death occurs before this date, the current regime applies, and 100% relief is available without restriction. 

Strategies to reduce IHT exposure: 

  • Succession planning: Begin considering how ownership might transition to the next generation to maximise relief under the current rules.

  • Restructuring assets: Explore options like using trusts, family investment companies, or restructuring shares to protect the business from higher IHT charges. 

Should I be thinking about transferring my business to the next generation sooner rather than later? 

If you intend for your family members to inherit or manage the business, transferring ownership during your lifetime can reduce IHT exposure. Key points to consider: 

  • Lifetime gifts: Transfers reduce the value of your estate, potentially lowering IHT liability.

  • Tax consequences: Transfers can trigger Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT), which must be factored into your decision.

  • Seven-year rule: Gifts are only exempt from IHT if you survive for seven years after making them. Otherwise, both IHT and CGT could apply, potentially increasing costs compared to retaining the asset. 

Non-tax considerations: 

  • Safeguard the business against risks such as divorce, death, or bankruptcy affecting new owners.

  • Ensure successors have the ability and intent to manage the business effectively.

  • Evaluate whether immediate transfer aligns with long-term business stability. 

In some cases, retaining the business and optimising other estate planning measures may be more efficient. 

 

How can I bring in other family members to my business without losing control? 

You can transfer economic benefits to family members while retaining control through: 

  • Trusts: Assets can be placed in a trust, with you as a trustee, preserving oversight.

  • Family Investment Companies (FICs): These allow structured ownership and tax-efficient distributions.

  • Different share classes: Issue shares with differing voting, capital and income rights to retain decision-making authority.

  • Appointments: Assign family members to key roles, such as directorships, without transferring majority ownership. 

Each option has varying tax implications and should be tailored to your individual or family circumstances. 

 

If I give half of my business to my spouse will this reduce my IHT exposure? My share will still be worth more than £1m. 

If your spouse does not have other BPR qualifying assets then yes, transferring a share of the business to your spouse is an effective way to utilise their £1 million BPR allowance, potentially reducing your IHT exposure by up to £200,000.  Key considerations: 

Non-tax implications: Divorce or remarriage could affect business ownership and succession plans. 

Will planning: Any unused BPR allowance is not transferable on death, so ensure that your will utilises this allowance effectively on the first death. Alternatively, this could be actioned after death via a deed of variation. 

 

If I transfer part of my business to my children now but die within 7 years will I be worse off than if I do nothing? 

Potentially, yes. If you die within seven years of making a gift, it could be subject to both CGT and IHT, potentially resulting in higher costs than retaining the asset.  

Planning should account for both tax scenarios and your expected lifespan. 

 

If I leave the UK will my interest in the family business be outside of the UK IHT net? 

The IHT treatment depends on: 

  • Location of the asset: If your business remains UK-based, it remains subject to UK IHT regardless of your residence status.

  • Residence status: If you leave the UK but meet the long-term residence conditions, you remain within the UK IHT net for 3–10 years after leaving, depending on your prior UK residence duration.

A permanent move of the business outside the UK may remove it from UK IHT, subject to these conditions. 

 

If I leave the UK and transfer my shares in my UK business to an offshore company, will I avoid IHT? 

Generally, yes, but: 

  • IHT may still apply if the offshore shares derive value from UK residential property.

  • The transfer could trigger other taxes such as CGT, depending on the circumstances.

  • Higher taxes could apply depending on where the offshore company is located. 

It would be advisable to seek professional advice to navigate tax and legal complexities. 

 

My estate will have an IHT liability on my death, what would be the best way to extract funds from the business to pay for this 

Options to extract funds include: 

  • Dividend distributions: A straightforward way to release profits.

  • Share buybacks: The company purchases your shares to release cash.

  • Partial sale: Selling part of the business to generate liquidity. 

The timing of the extraction is also fundamental in the event you hold cash in your estate which is subject to IHT at 40% but was previously protected by the BPR relief whilst it was held within the business. 

Alternatively the use life insurance to cover the IHT liability could also be an option to ensure it does not burden heirs. 

 

I am interested in setting up a trust to benefit my grandchildren.  Can I escape the IHT net by settling shares in my family business on the trust? 

While trusts can reduce IHT exposure, they come with their own tax considerations: 

The October 2024 budget revealed that trusts will also have their own £1m BPR allowance. However, this allowance will be split for any trusts created post 30 October 2024.  

The details relating to trust arrangements and BPR are currently being consulted and further information is expected to follow after the consultation in 2025. 

 

I have previously nominated my children to receive my pension in the event of my death. Will they suffer IHT on my death? 

From 6 April 2027, unused pension funds inherited by children will: 

  • Be subject to IHT (subject to available NRB allowance).

  • Potentially attract income tax if withdrawn after age 75. 

Transfers to a spouse remain exempt under the spouse exemption rules. 

 

Is it still worthwhile funding my pension? 

Yes, funding a pension is still beneficial as it is a way to save towards your retirement savings and provides income tax relief  

The tax efficiency of passing on the pension fund to future generations has diminished due to the IHT change. 

 

I haven’t started to draw my pension and am currently living off other savings. Should I start living off my pension now or even draw it all down?      

This depends on your circumstances and should be considered on a case-by-case basis: 

  • If a large cash sum is needed, consider withdrawing the 25% tax-free lump sum.

  • Consider blending withdrawals from pension and savings to manage tax efficiency utilising tax free allowances where available.

  • Avoid drawing down the pension if it results in a higher tax rate than the 40% IHT. 

It would be advisable to evaluate your goals, income needs, and tax position with an advisor before making any decisions. 

 

Other Frequently Asked Questions

Can businesses with substantial cash and investments still qualify for BPR?

If the business is holding substantial cash, there is a risk that BPR can be restricted or denied altogether. However, steps can be taken to improve the BPR position. These could include reinvesting the cash in the qualifying business or making distributions to its shareholders.

Holding business investments does not necessarily mean BPR will be denied or restricted, provided the investment activities do not account for more than 50% of the business activities overall. However, if the business is holding or only making investments, then it will not be eligible for BPR.

 

How can a business with a combination of trading and investment activities ensure full qualification for BPR?

If a business has mixed business activities, such as 70% trading activities and 30% investment activities, it cannot automatically be assumed that only 70% of the business is eligible for BPR and the remaining 30% will be denied BPR. If structured correctly, the business as a whole (including the 30%) could qualify for BPR provided the investment assets do not fall into the definition of an ‘excepted asset’. Excepted assets are those which are neither used in the business nor earmarked for future business use. An example of an excepted asset could be a property owned by the business but used personally by one of the directors as their home.

Depending on the business structure, there may be scenarios where the investment activities are integral to the entire business. In that instance, the entire business would be eligible for BPR. Therefore, it is essential to scrutinise the business to determine its eligibility for BPR if any investment activities are present. If the business does not qualify for relief, there might be actions that could be recommended to enhance its eligibility or reorganise its structure to ensure that the trading component qualifies for BPR.

 

If the business has been trading for less than two years, will the business qualify for Business Property Relief BPR?

The eligibility period for BPR is determined based on a two-year ownership test rather than the duration of trading. This means that BPR may apply even if an individual holds qualifying shares for

over two years while the business has been trading for less than that period. It is crucial to emphasise that the business must be trading actively or satisfy the relevant business property definition during the relevant transfer or chargeable event.

Furthermore, the legislation outlines specific scenarios in which BPR may be accessible with an ownership period of less than two years. These circumstances include the replacement of assets eligible for BPR with new qualifying property, inheritance by a surviving spouse, or two successive transfers occurring within a short timeframe.

 

I think my business qualifies for BPR, but HMRC disagrees. What steps should I take to address this disagreement?

The first step would be to review HMRCs response to understand the specific reasons for their disagreement. Once their concerns have been understood, a counter argument should be presented if appropriate. The counter argument should be supported with contemporaneous evidence if available. It may also be worthwhile consulting with tax professional at this point if you have not done so already, to help you prepare and present a case to HMRC as robustly as possible.

If you are still dissatisfied with HMRCs final decision, you may wish to request a statutory review and/or make an appeal to an independent tax tribunal. The latter can be costly and, therefore, a statutory review may be preferrable in the first instance.

 

Can an overseas registered business qualify for BPR?

Yes, provided the individual or trust holding the interest in the business, and the overseas business itself, meet the conditions for BPR to apply.

Double Tax Treaties may need to be considered between the UK and the country where the overseas business is registered as this could impact the ultimate tax treatment of the asset and its eligibility for BPR.

 

A discretionary trust owns shares which did not meet the conditions for BPR. A ten-year anniversary charge has arisen, but the trustees do not have any cash to settle the IHT liability. What are their options to settle the debt?

There are a several options available for the trustees to generate adequate funds to settle the IHT liability.

  • Sell shares – the trustees could sell sufficient shares to cover the IHT liability. Selling shares may also trigger other taxes such capital gains tax and therefore this will also need to be taken into consideration to ensure the sale proceeds are sufficient to cover all the taxes due, not only the IHT liability.
  • Issue a dividend – Another approach would be for the company to issue a dividend payment to its shareholders. This could then be used to settle the debt. Again, there may also be other taxes to consider such as income tax and therefore the dividend declared must be sufficient to cover all tax liabilities.
  • Loan – The trustees may wish to obtain a loan or third-party bank debt to settle the liability. The repayment terms should be agreed at the outset to avoid any potential conflicts in the future.
  • Instalment option – Subject to certain conditions being met, the IHT liability can be paid under an instalment option. In many cases, the outstanding liability will incur interest but there are limited circumstances in which this can be interest free.

 

Do Furnished Holiday Lets (FHLs) qualify for BPR?

In principle, FHLs have the potential to qualify for BPR; however, achieving BPR eligibility for holiday lets, particularly FHLs, has proven to be challenging in practice.

Case law developments highlight two pivotal factors that influence BPR qualification: the extent of services provided and the owner's engagement in holidaymakers' activities. On one extreme, where owners merely engage in long-term property rentals, characterised as a passive investment, BPR qualification is unlikely. Conversely, running a hotel, representing an active business, qualifies for BPR. FHLs typically occupy a middle ground, requiring a demonstration that the level of services offered is comparable to those of a hotel to secure BPR.

Notably, it is crucial to recognise that the definition of an FHL for income tax and capital gains tax does not extend to inheritance tax considerations.

 

If a donor gifts shares qualifying for BPR to another individual and passes away within seven years, what is the BPR position on death? Does it change if the gift was made to a trust?

In the event that a donor does not survive seven years after making a gift to an individual, the gift becomes chargeable and the BPR position on death comes into play. Provided the donor met the conditions for BPR at the time of the gift, and the donee retains the relevant business throughout the ownership period or replaces it with other qualifying business property, BPR is not clawed back upon the donor's death. However, if the property no longer qualifies as relevant business property, such as through a sale, BPR may be clawed back upon death.

In the case of a gift to a trust, the same principles mentioned above apply to trusts.

The donor's nil rate band allowance on death could be impacted, depending on whether the gift was made to an individual or a trust and whether or not BPR is clawed back. Understanding the seven-year rule for gifted shares is complex particularly where assets qualify for BPR.

 
 
 
 
 
 
 
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