WHY DO I NEED TO KNOW ABOUT BUSINESS PROPERTY RELIEF (BPR)?
As a business owner, you have many things to consider when setting up and running your business, and inheritance tax (IHT) is unlikely to be at the front of your mind. IHT tends to come into focus when you start to plan for your family's future, initially by making a Will, and later when you begin to think about your own retirement and business succession.
At this point, a potential 40% IHT charge on everything you want to pass to your family, which may include your business, is likely to be become a significant consideration, and this is where business property relief (BPR) comes in, offering the possibility of eliminating or substantially reducing any IHT bill.
However, the rules for BPR, together with another IHT relief - Agricultural Property Relief - are due to change significantly from 6 April 2026. Among other things, these currently unlimited reliefs will be subject to a £1 million limit on the value of property that can benefit from 100% relief. This limit will renew every seven years and be shared between agricultural and business property, where relevant. We examine these proposals further below.
WHAT IS BPR?
BPR relieves the cost of IHT on transferring ownership of ‘relevant business property’, which includes:
- shares in qualifying unquoted trading companies (100% relief);
- interests in businesses, including in a partnership (100% relief).
- shares listed on AIM (100% relief under current rules);
- land, buildings, machinery and plant, held personally or in certain trusts, and used in a company’s (or partnership’s) business carried on by the transferor (50% relief).
As indicated above, if BPR applies to an asset, its value is reduced by either 50% or 100% when calculating IHT, depending on the type of asset.
There is currently no limit on the value of property to which BPR, at either 50% or 100%, can apply.
Conditions for an asset to qualify for BPR include the following (among others):
- a two-year period of ownership leading up to the transfer.
- the business is carried on with the intention of making a profit.
- the business must not consist “wholly or mainly” of dealing in shares, land or buildings or making or holding investments. ("Wholly or mainly" is generally considered to mean more than 50%.)
HOW AND WHEN ARE THE RULES CHANGING?
With effect from 6 April 2026, the government plans to introduce the following principal measures:
Individuals
- 100% BPR will be limited to a £1 million allowance, renewable every 7 years. (This is intended to increase in line with the consumer prices index (CPI) for tax years after 6 April 2030.)
- Where relevant, the allowance will be shared between qualifying agricultural and business property.
- For qualifying property over the £1 million allowance, relief will be capped at 50%.
- AIM-listed shares, among others, will be restricted to 50% relief.
Trusts
- Trustees will also have a £1 million allowance on property qualifying for 100% relief. This will refresh every 10 years, and will apply to relieve IHT charges that apply to trusts every 10 years and when property leaves the trust, which can be up to a maximum of 6%.
- Trusts set up by the same settlor on or after 30 October 2024 will share a single allowance.
- 50% relief will apply to any qualifying property over the available threshold.
- The trustees' allowance is also intended to increase in line with the CPI from 6 April 2030.
Transitional rules
Transitional rules will mitigate the impact of the changes for transfers made before 30 October 2024, or during the period between that date and 6 April 2026, and where a donor dies before 6 April 2026.
WHAT CAN I DO BEFORE 6 APRIL 2026?
As a business owner, you should use the months before April 2026 to review the structuring and other planning options available to you. Depending on your circumstances, these may include the following:
Lifetime planning
Transfer qualifying business property to a spouse or civil partner, if relevant - all individuals will be entitled to their own £1 million allowance. However, under the new rules, it will not be possible to transfer any unused allowance to a surviving spouse or civil partner, so try to ensure that, if you are part of a couple, you both own fully relievable property up to the £1 million threshold.
Make gifts to family members or others whom you wish to inherit your business property. Outright gifts will continue to qualify as "potentially exempt transfers" (PETs) and pass free of tax provided the donor survives for at least 7 years from the date the gift is made. However, as gifts may dilute your control of the company, consider carefully the level and recipient of any such gift.
Transfer property into trust – until 6 April 2026, there is no immediate IHT charge when property qualifying for 100% BPR or APR is transferred into a trust, regardless of its value. Provided the settlor either dies before 6 April 2026 or survives for at least 7 years following the transfer, there will also be no later charge to IHT on qualifying property exceeding the settlor's £1 million allowance. However, from 6 April 2026, ten-yearly and exit charges to tax may apply to qualifying trust property above the trustees' available allowance.
Making a gift into trust, rather than outright, avoids ceding control to any individual beneficiary. However, it is important to choose your trustees with care, and also ensure that you are not a beneficiary of the trust to avoid the property being brought back into your estate under the rules for gifts with a reservation of benefit (GROBs).
Alternative structures such as family investment companies (FIC), for example, or other forms of corporate restructuring, may provide an alternative to trusts in appropriate circumstances. One advantage of corporate structures over trusts is that ten-yearly and exit charges to IHT do not apply. However, trusts may provide greater asset protection, where this is relevant.
FICs and other corporate structures may offer valuable flexibility, in that different share classes can be created – non-voting shares providing value without control to children, for example. This might enable you to transfer control to your children or other successors on a gradual basis, perhaps establishing wealth management and transition processes in the articles of the company or other governing documents.
A formal valuation would be required in order to accurately value different classes of shareholding, and capital gains tax (CGT) and other tax issues would also require consideration.
Take out a life insurance policy – under the existing rules, life insurance proceeds will fall outside the IHT net and may be used by beneficiaries to pay any IHT bill following your death, for example, if you did not survive for 7 years after making a gift or settling property into trust. This is an example of where a valuation will be crucial to determine the level of cover required.
Borrow or sell parts of the business to realise funds to pay future IHT - where this is possible it has an additional advantage of reducing the overall value of the business for tax purposes.
Estate planning
Make a Will, or if you already have one, review it to ensure it includes appropriate provision for your business property. A gift of business property may need to be amended to include partly relievable, as well as fully relievable property, for example.
Valuation and capital gains tax (CGT) considerations
Value APR/BPR qualifying property – in order to plan properly, it is important to know the value of both fully relievable and partly relievable property that you own. Valuations are likely to take time, not least because of the number of businesses seeking them before the end of the tax year, so it is vital to act quickly.
CGT – when making a gift or transfer of business property into a trust or other structure, the CGT consequences will also require consideration. Holdover relief may be available to avoid an immediate CGT charge on any such transfer. Where it applies, the recipient of the property inherits your base cost as transferor.
However, there are two types of CGT holdover relief, and the conditions that apply for relief on transfers of property into trust differ from those that apply to transfers to individuals, companies and other entities. Where property is not being settled, for a gain to qualify for holdover relief, a trading threshold applies, whereby least 80% of the assets, turnover and activity in the business must relate to the trade.
This is far more stringent than the "wholly or mainly" threshold for BPR, explained above.
AND FINALLY
Over the last few months, there had been some speculation that the proposed measures might be dropped or mitigated. However, on 21 July, the Government published draft legislation, and the proposed provisions remain largely unchanged from those previously proposed. We will continue to follow developments and will report if any changes are announced.
In the meantime, it is important to plan on the basis that the changes will take place in their existing form. However, before making any decisions, you should take advice as to how the new rules might affect you specifically, as well as any trusts of which you are the settlor or trustee. If you would like to do so, please get in touch with your usual Howard Kennedy contact, or a member of our Private Client team.
Nothing in this client note constitutes legal advice to any person.
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