What Is Business Property Relief for Inheritance Tax?

Business Property Relief (BPR) is a provision within the United Kingdom’s Inheritance Tax (IHT) system. This relief aims to reduce the tax liability on certain business assets when they are transferred, either as a gift during an individual’s lifetime or as part of their estate upon death. Its primary purpose is to support the continuity of family businesses and encourage investment in active trading enterprises. By alleviating a portion of the Inheritance Tax burden, BPR helps prevent the forced sale of a business or its assets simply to cover tax obligations. This mechanism helps preserve business legacies and foster economic activity.

Understanding Business Property Relief Eligibility

The relief is broadly available for businesses operated for gain, encompassing various ownership structures. This includes businesses carried on by an individual as a sole trader, interests in partnerships, or shares in companies. The relief primarily targets businesses engaged in active trading.

While BPR supports a wide range of business entities, a fundamental distinction is drawn between trading businesses and those primarily involved in investments. This focus ensures that the tax incentive aligns with the objective of supporting productive economic activity. Consequently, individuals owning businesses directly, or holding shares in qualifying companies, may find their assets eligible for this relief, subject to specific conditions.

Qualifying Business Assets

Business Property Relief can apply to various specific types of property, provided other conditions, such as ownership duration and the business’s trading status, are met. Shares in an unquoted company typically qualify for 100% relief. An unquoted company is generally defined as one whose shares are not listed on a recognized stock exchange, though shares listed on the Alternative Investment Market (AIM) are often treated as unquoted for BPR purposes.

For shares in a quoted company, relief is usually available at a 50% rate, but only if the individual transferring the shares had control of the company immediately before the transfer. Control, in this context, generally means holding more than 50% of the voting rights. A business or an interest in a business, such as a sole proprietorship or a partnership interest, qualifies for 100% relief. This full relief supports active trading enterprises.

Land, buildings, machinery, or plant used wholly or mainly for the purposes of a business can also qualify for BPR, usually at a 50% rate. This applies when these assets are owned by the transferor but used by a company they control or by a partnership in which they are a partner. For instance, if a business owner personally owns the premises from which their qualifying company operates, those premises may be eligible for this partial relief.

Conditions for Relief

For business assets to receive Business Property Relief, several prerequisites and limitations must be satisfied. A key requirement is the ownership period: the transferor must have owned the property for at least two years immediately preceding the transfer or death. There are specific exceptions, such as when the property replaces other qualifying business property, or if it was inherited from a spouse, where the combined ownership period can be considered.

The business itself must satisfy the “wholly or mainly trading” test. This means the business must not consist wholly or mainly of making or holding investments. Examples of investment businesses that generally do not qualify include those primarily dealing in securities, stocks, shares, land, or buildings, or those engaged in property rental without substantial additional services. Conversely, businesses involved in manufacturing, retail, or service provision are typically seen as trading enterprises.

Certain assets within a qualifying business, known as “excepted assets,” may not receive BPR. An asset is considered excepted if it was not used wholly or mainly for the business’s purposes in the two years before the transfer, or if it was not required for future use in the business. Common examples include excessive cash reserves not needed for current or future business operations, or assets held for personal use within the business.

From April 6, 2026, significant changes are planned, including a £1 million cap on 100% relief for combined agricultural and business property, with amounts above this threshold receiving 50% relief. Additionally, shares listed on AIM will see their relief reduced to 50% from this date, no longer qualifying for the £1 million allowance.

Claiming Business Property Relief

The process for claiming Business Property Relief is integrated with the overall Inheritance Tax assessment. For estates after death, BPR is claimed as part of the Inheritance Tax account, which is submitted to HM Revenue & Customs (HMRC) on form IHT400. For lifetime transfers, the claim is made using form IHT100. These forms require comprehensive details about the deceased’s estate or the assets transferred.

To support a BPR claim, specific information must be provided to HMRC. This includes detailed information about the business or asset, evidence confirming the ownership period, and a clear description of the business activities to demonstrate it meets the trading test. Supporting documentation is often requested to substantiate the claim. This may include business accounts, share certificates, and professional valuation reports for the assets in question.

Once the relevant Inheritance Tax form, along with the BPR claim, is submitted, HMRC reviews the information. The review process may involve queries from HMRC to clarify details or request additional evidence. A thorough submission can facilitate a smoother assessment.