Inheritance tax is applied to estates that have a total value over the current threshold.

For the 2023/24 financial year, that basic threshold is £325,000, and everything above that value taxed at 40 per cent.

With rising property prices, more estates are now liable for inheritance tax.

If you own business property, then business property relief (BPR) can be valuable when it comes to inheritance tax (IHT).

Applied correctly, it reduces inheritance tax bills significantly.

What is business property relief, and how is it applied?

What is business property relief?

Business Property Relief IHT is a tax relief that can reduce, or even eliminate, the Inheritance Tax liability on certain business assets included in an individual’s estate upon their death.

BPR is primarily designed to support businesses, particularly small and family-owned enterprises, allowing assets to be distributed free of punitive taxes.

By providing relief on the transfer of relevant assets, BPR can ensure the continuity of business operations.

In many cases, business assets like property and equipment make up most of the overall value of an estate.

This means BPR can provide a significant reduction in the amount of inheritance tax that must be paid.

How does business property relief work?

IHT business property relief reduces the taxable value of business assets.

It works by reducing the taxable value of business assets by either 50 or 100 per cent depending on the nature of the asset and how it is used.

To qualify for BPR, your business should not be traded on the stock exchange. This means that private limited companies, partnerships, and sole trader companies may all qualify for business property relief for IHT.

BPR applies to two main categories of business assets:

Business property

This can include assets such as a business in its entirety, or an interest in a business, including partnerships and sole traders. This relief may cover the full value of the business, or a percentage, depending on several factors. Any property that is owned by an agricultural business may initially benefit from Agricultural Property Relief.

Unquoted shares

Business property relief inheritance tax also covers unquoted shares in a company. If the deceased person owned shares in a qualifying unquoted company, the shares may be eligible for BPR.

This includes assets like a business, or interest in a business, including partnerships and sole traders. As above, the relief can cover the full or a percentage of the value of the business property, depending on various factors.

To qualify for business property relief assets will need to be owned for at least two years.

How is BPR calculated?

Business property relief is available for a range of assets and will be applied at either 50 or 100 per cent.

  • A business or an interest in a business (100 per cent)
  • Unquoted shares in a company which gave the holder control of the company (100 per cent)
  • Other unquoted shares (100 per cent)
  • Quoted shares in a company which gave the holder control of the company (50 per cent)
  • Any land, building, machinery or plant which was used immediately before the transfer either wholly or mainly for the purpose of business being carried on by the transferor either solely, in a partnership or by a company on which they then had control (50 per cent)
  • Any land, plant, machinery or building, where the property was settled property and the transferor had an interest in possession (50 per cent)

Do you pay inheritance tax on business property?

Business Property Relief (BPR) may reduce or eliminate the Inheritance Tax Liability (IHT) on certain business assets.

If business property qualifies for BPR, it may be partially or wholly exempt from Inheritance Tax. In many cases, this exemption can bring the overall value of the estate below the IHT threshold.

The rules regarding BPR are complex and the conditions are liable to change. The relief is intended to support the continuity of businesses, especially small and family-owned enterprises.

To qualify for BPR, the business property must meet specific criteria.

This includes being used for trading purposes, and not for investment purposes.

This business must be a qualifying business, and certain types of assets, like cash or investments, may not qualify.

What are qualifying businesses for Business Property Relief (BPR)?

To be eligible for BPR, businesses must meet certain criteria:

Trading business

The business must be a trading business rather than an investment business. This means that the business carries out trading activities, such as buying and selling goods or providing services. Businesses that are engaged in activities like investment or property development may not qualify.

Ownership and control

The business property must be owned by the deceased person or be otherwise included in the deceased’s estate. The deceased should have had effective control of the business, or at least 50 per cent of a company’s voting rights.

Continuous trading requirement

The business should have been engaged in trading activities up to the date of death. If a business has ceased trading this must have happened within the three years leading up to the death. The business must have been trading for the majority of the previous two years prior to the business ceasing to trade. This requirement can be complex to understand so it’s important to seek professional advice if a company has ceased trading.

Exclusions for investment businesses

Some types of businesses are excluded from business property relief. These are businesses that are primarily involved in activities such as investment management or receiving rental income. Businesses engaged in dealing in stock, shares, buildings or land will not generally qualify for relief.

Agricultural property

Agricultural property may qualify for a separate Agricultural Property Relief (APR). This has some overlap with BPR for businesses that are engaged in agricultural activities. Delineating what may qualify for APR and what may receive BPR can be complicated, so it’s important to seek professional advice.

Stock exchange listings

BPR is typically designed for unquoted shares in private companies. Shares of businesses listed on a recognised stock exchange will not normally qualify for business property relief.

Subsidiary companies

If a company has subsidiaries, at least 50 per cent of the company’s activities must be trading activities. If the company hold substantial investments or non-trading activities this will have an impact on the company’s qualification for BPR.

Understanding how it is applied is essential to ensure that the correct amount of Business Property Relief (BPR) is claimed on any estate. Tax planning, including Inheritance Tax planning, is essential for anyone whose estate is likely to be higher than the current £325,000 threshold.

How is business property relief claimed?

Business property relief is claimed as part of the Inheritance Tax (IHT) process.

When someone dies, the estate will be liable for Inheritance Tax.

This is how BPR is applied when IHT is calculated:

Identify qualifying business property

The first step is to identify any business property that may qualify for BPR within the estate of the deceased person.

Eligibility assessment

The business property within the estate should then be assessed to gauge whether it meets the eligibility criteria for Business Property Relief. This will involve assessing whether it is a qualifying trading business, the ownership and control requirements, and whether the business has been properly engaged in trading activities.

Business property valuation

Any qualifying business property will then need to be determined for Inheritance Tax purposes. Usually, this will include professional valuations, particularly if the estate includes complex business assets.

Inheritance Tax return

When the Inheritance Tax return is filed with HM Revenue & Customs (HMRC), the executor or the administrator of the estate will need to include details of any qualifying business property. This will include the value of the property as well as its eligibility for BPR.

Documentation and evidence

Supporting documentation and evidence will be required to demonstrate the eligibility of business property for BPR. This will usually include details about the nature of the business, its trading activities, and any other relevant contracts or agreements.

Professional advice

Seeking professional advice from tax and financial advisors, as well as legal specialists is highly recommended when dealing with business assets and inheritance tax. Tax professionals can help you navigate the complex rules around BPR and IHT, ensuring that everything is included that can be, and that the necessary conditions for BPR are met.

HMRC assessment

The Inheritance Tax return will be assessed by HMRC, including any claimed Business Property Relief. It may at this stage ask for additional information or clarification. HMRC will then calculate the final Inheritance Tax Liability.

Are business assets exempt from inheritance tax?

In some cases, business assets may be exempt, or partially exempt, from Inheritance Tax.

Any assets that are not related to a trading business or that do not meet the necessary qualifying criteria may still be subject to Inheritance Tax.

The eligibility of specific business assets should be carefully assessed and expert advice sought to ensure that relevant tax regulations are complied with.

Claiming business property relief with Digital Accounting & Finance

At Digital Accounting & Finance (DAAFL), we work with companies and individuals to ensure any assets that may qualify for BPR, or other reliefs, are exempted from Inheritance Tax.

Inheritance Tax planning can help to ensure assets are identified, and all appropriate reliefs are claimed.

Our experienced team of small business tax accountants can take the complexity out of inheritance planning, ensuring your loved ones are taken care of and giving you valuable peace of mind.

Contact us to find out more about Inheritance Tax planning and how we can help.