Techzone

Overview

Business Relief (formerly known as Business Property Relief) reduces the value of business property for inheritance tax. It's available on the transfers of business asset during lifetime or on death. To qualify the business asset must usually have been owned throughout the two years prior to death or transfer.

Relief is given to ensure that following the death of a business owner, a family-owned business can survive as a trading entity without having to be sold or broken up to pay an inheritance tax liability. But it's also available to private investors who invest in qualifying businesses. 

Investing in shares which qualify for business relief is a popular estate planning option. It has two key benefits over more traditional gifting as a means to reduce the estate.

• The investment will recieve relief from inheritance tax after two years
• The investor retains access to the investment and any dividends which are paid

However, these benefits must be balanced against the increased investment risk of investing in smaller unlisted companies and the risk that business relief may be withdrawn if in the future the business no longer qualifies - for example, if the business becomes publicly listed.

Rate of relief

The relief changes from 6 April 2026. Transitional rules also applied for the period between 30 October 2024 and 5 April 2026.

100% relief is available for the following assets, up to the value of the 100% relief allowance, currently £2.5 millon:

• A trading business or interest in a trading business (includes sole traders and partnerships)
• A holding of shares in an unquoted company generally smaller companies not listed on recognised stock exchange (not including AIM shares)
• EIS investments

50% relief:

• Any value in excess of the 100% relief allowance for a busness, interest in a business or shares in an unquoted company
• AIM Shares
• A controlling holding of shares in a quoted company - i.e. where the individual controls more than 50% of the voting rights
• Land, buildings, machinery or plant used wholly or mainly for the purposes of the business carried on by a company or partnership

Business relief is not available on:

• Investment businesses - there's no relief where the business wholly or mainly  deals in securities, stocks and shares, land or buildings, or making or holding investments, including shares in a company which carries on such a business.
  
  A business that operates as a rental or holiday lettings business will not unually qualify for BR, however theremay be cases where the level of additional services provided is so high that the activity can be considered as trading. Specialist advice is required in this these cases.
• Excepted assets -No relief will be given on the value of excepted assets. These are assets that have not been used wholly or mainly for the purpose of the business throguhout the two years before the transfer and are not required for the future use of the business. A typical example would be large reserves of cashe in excess of any reasonable business requirement.
• Businesses that are subject to a contract for sale or being would up, including assets subject to a Buy and Sell Agreement.

The 100% relief allowance - how it works

The 100% relief allowance applies to both Business Relief and Agricultural Relief, providing relief at 100% on qualifying assets up to the current allowance of £2.5 million. Any asset values exceeding this threshold will qualify for relief at the reduced rate of 50%.

The allowance covers the following:

• Lifetime transfers in the 7 years before death (failed PETs and CLTs)
• Assets in the estate at death
• Chargeable lifetime transfers (CLTs)

On death, the allowance is applied first to any failed PET and/or CLT in the last seven years from oldest to most recent. Any remaining allowance not used is available to set against BR/ AR qualifying assets in the death estate.

If the failed PETs or CLTs use the allowance in full, 50% relief is then applied to the remaining value of the gift, followed by any available NRB, to calculate the IHT due. If the failed gift results in IHT and the gift was made more than 3 years ago, taper relief can also apply.

During lifetime, the allowance can be applied when making a gift to a trust (chargeable lifetime transfer). The 100% relief allowance can be used to reduce the value of the CLT to nil. Any amount over the allowance will receive relief at 50%. The NRB can also still be set against the gift to reduce the CLT if needed.

For CLTs, the 100% relief allowance is not a lifetime allowance and will refresh every seven years in the same way as the NRB does.

As with the NRB, any unused 100% relief allowance can be claimed by a surviving spouse or civil partner. Therefore, a surviving spouse is able to claim BR at 100% on up to £5 million of qualifying BR assets in their death estate. The allowance is available to widow(er)s even if their spouse passed away prior to the introduction of the allowance.

Where an estate includes both agricultural and business assets, then the allowance will be applied proportionately across the qualifying assets.

Ownership period

To qualify for business relief the basic rule is that an asset must have been owned for two or more years.

There are three exceptions to this two year ownership test.

Replacement property

BR may still be available where relevant business property is sold, and new relevant business property is acquired. Provided the proceeds from the sale are used to purchase the replacement property within three years, the new business property will immediately qualify for relief if the combined ownership period is at least two years in the five year period prior to the transfer. If the individual dies before the replacement asset is purchased business property relief will be lost. 

The amount of relief on the new asset cannot be more than what it would have been had the original asset not been replaced.

When replacement relief is being relied on for a transfer of AIM shares to a 100% qualifying BR product and the donor dies on or after 6 April 2026, BR will be restricted to 50% relief. If the replacement BR product has been held for two years, then replacement relief will not be required as the qualifying period for the new product would be met.

Where business property has been gifted the purchase of fresh business property will not count as a replacement property and a fresh two year qualification window will commence.

Where business property has been gifted the purchase of fresh business property will not count as a replacement property and a fresh two year qualification window will commence.

Inheritance from spouse

When a widow/widower (or civil partner) inherits relevant property from their deceased spouse (or partner), the new ownership period includes the time the deceased has owned it  - e.g. if the deceased had owned the property for more than two years, the widow/widower will immediately inherit a qualifying two-year period. If inherited after the deceased had only owned for say one year, the surviving spouse would need to own the relevant property for another year to complete the qualifying period. The length of time they were married doesn't matter. 

This is only the case where the transfer is on death. It does not apply to lifetime transfers between spouses, but there may still be relaxation under the provisions for 'successive transfers' (see below). 

Successive transfers

BR will be given on a second transfer of BR qualifying assets even if the two year ownership requirement is not met provided the earlier transfer qualified for BR and either of the two transfers were made on death.

Gifting Business Relief Assets 

On death 

Business relief will be available on death if the assets are qualifying and were owned by the deceased for at least two years prior to death (or the rules for replacement assets, successive transfers or inheritance from spouse are satisfied). 

The individual who inherits the business assets will immediately benefit from business relief on those assets provided the two year ownership period had been met on the death of the original owner and the asset still qualifies as a relevant business asset.

Where the deceased had not met the two year ownership period rules and subsequently no business relief was available on death, the two year ownership for the new owner of those assets will commence from the date of death.

During lifetime

Gifts to spouse

Lifetime gifts of business assets between spouses will be covered by the spousal exemption and do not rely upon BR. Therefore, should the donor die within seven years, the surviving spouse does not need to retain the asset for the original transfer to remain exempt.

Relevant Property Trusts

100% Relief Allowance

The 100% relief allowance is available to trusts for the purpose of periodic and exit charges. This is a separate allowance from the settlor's own 100% relief allowance and is for the purpose of calculating periodic and exit charges. However, the date the trust was established may affect how much of the allowance is available to the trust:

• Trusts created before 30 October 2024 and which held qualifying business property before this date, will each have their own 100% relief allowance applicable from the first 10 year anniversary after 6 April 2026
• For all trusts created by the same settlor after 30 October 2024 there will only be one £2.5 million relief allowance that can be allocated to trusts during the lifetime of a settlor – the settlor does not get a refreshed allowance to allocate to trusts every seven years.  This will be allocated in chronological order  based on the amount of BR assets transferred to the trust. The allowance is not transferable between trusts even if the earliest trust no longer holds business assets.

Periodic charges 

Trustees will have to satisfy the two year ownership period on any business assets within the trust before they qualify for relief. Business relief reduces the value of the business property for the purpose of the ten yearly periodic charge.

The 100% relief allowance for a relevant property trust will refresh every 10 years, so that qualifying assets held in that trust benefits from 100% relief up to a value of the allowance available to the trust on each periodic charge. This avoids business property being double counted against the allowance if they are held long term. 

Any exits of qualifying assets between ten year anniversary dates will reduce the allowance available at the next period charge date.

Exit charges

Where qualifying business assets are transferred ‘in specie’ to a beneficiary, there will be no exit charge when the value of the asset is within the 100% relief allowance available to the trust.

However, exit charges may apply if the assets leaving the trust no longer qualify for relief. This may be the case if the trustees sell the business assets prior to the distribution or the business assets are paid to a beneficiary before the trustees have satisfied the two year ownership period.

Exit charges are based on the IHT effective rate at the previous 10 year anniversary or, for exits in the first 10 years, the ‘deemed effective rate’ when the trust was created.

The deemed effective rate is based on the value of the trust property immediately after the trust was established. At that time the trustees would not have held the business assets for the required two year qualification period and consequently business relief is disregarded when calculating the deemed effective rate which would apply to non-qualifying assets.

After the first 10 years, for the purposes of calculating the exit charge rate any business relief available to the trustees at 10 year charge point is ignored. This means that if non BR qualifying assets are distributed from the trust to a beneficiary an exit charge can apply.

Interaction with Residence Nil Rate Band (RNRB)

The residence nil rate band (RNRB) provides additional nil rate band where someone leaves their main residence to their direct descendants on death. However, the RNRB begins to be tapered once the net value of the estate is more than £2 million. £1 of RNRB is lost for every £2 over this limit.

The value used for tapering purposes is the estate (including the value of any settled property which the deceased held a qualifying interest in possession, such as immediate post death interest trusts) after any liabilities are deducted, but before any reliefs or allowances are applied.

So while BR qualifying assets reduce the taxable value of the estate for IHT, they could result in the loss of the residence nil rate band as the relief is ignored when determining whether the taper applies to an estate.

Lifetime gifts to avoid tapering

Lifetime gifts (including death bed gifts) aren’t included in the net estate for tapering of the residence nil rate band, even if teh donor dies within seven years. Gifting qualifying business assets, either to an individual or to a trust, can reinstate the RNRB if the net estate is reduced to £2 million or less. However, individuals making lifetime gifts need to be careful that the gift doesn’t affect business relief. The recipient of the gift must retain ownership of business assets (or replacements) for seven years, or until death if earlier, for relief to remain available on the initial gift.

Will planning

If business assets are inherited by the surviving spouse it could lead to the RNRB, including any transferable RNRB from the first spouse, being tapered on the second death. If the business assets are placed in a discretionary trust, the spouse can be included as a potential beneficiary if needed, but it would keep the business assets outside of the estate for tapering purposes and may help retain the RNRB.

If the surviving spouse is given a life interest in qualifying business assets, the holding will immediately qualify for business relief, as long as the holding is maintained. However, they will be taken into account when determining the availability of the life tenant’s RNRB. When qualifying business assets are passed to the remaindermen of the trust, a new two year ownership period will start. 

ISAs holding AIM shares

AIM shares can be held within a stocks and shares ISA. These shares typically qualify for business relief after two years of ownership which means the ISA would be free of IHT.

The two year ownership period will apply where AIM shares are purchased with new subscriptions or existing funds are switched to AIM shares within an ISA. The replacement property rules will apply where qualifying AIM shares are sold and repurchased within the ISA, meaning that the ownership period does not reset when the shares are purchased by the ISA manager. However, if the client instructs the ISA manager to repurchase more shares than the original amount sold, any additional shares must start a new two year period.

Borrowing to acquire qualifying business assets

It’s no longer possible to reduce the value of an estate for IHT purposes by securing a loan to acquire property qualifying for business relief.

Where money is borrowed to acquire assets qualifying for business relief, the amount of loan firstly reduces the value of the assets that qualify for relief. This is the case regardless of whether the loan is secured against the business assets. Business relief is given against the net value of the asset after deduction of the loan. Any remaining value of the loan can be set against any other assets that are chargeable to tax, as long as the loan is repaid on death.

Transitional rules from 30 October 2024

Following the announcement of the changes to BR and AR in the 2024 Autumn budget, transitional rules were introduced which apply to lifetime transfers made after 30 October 2024.

The 100% relief allowance will apply to transfers of qualifying assets made after 30 October 2024 if the donor dies after 6 April 2026 but within 7 years of the date of the transfer.  If the donor died before 6 April 2026 the transfer will be a failed PET, but 100% relief will be available on the full amount of the transfer. 

Chargeable lifetime transfers (CLTs) of qualifying assets in the transitional period will not count towards the 100% relief allowance provided the settlor survives for seven years from the date of transfer. 

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

• the value of any property transferred into trust during the seven years before death will be subject to IHT in the same way as a failed PET
• the settlor's 100% relief allowance will apply to these transfers of qualifying assets and will reduce the allowance available on any later chargeable lifetime transfers or on death
• Any part of the failed transfer in excess to the 100% relief allowance will receive relief at 50%

Transfers of AIM shares during the transitional period which become failed PETs/CLTs if the donor died with seven years of the transfer receive relief at the reduced rate of 50% applying if death is after 6 April 2026.