As a property developer, while many taxes will be relevant to your day-to-day work, inheritance tax (IHT) is unlikely to be one of them. 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, and there is currently no limit on the value of property to which BPR, at either 50% or 100%, can apply.
For an asset to qualify for BPR, certain conditions must be fulfilled. In most cases, the property must have been owned for two years prior to the relevant transfer, and of fundamental importance, the business must be carried on with the intention of making a profit. In addition, it must not consist “wholly or mainly” of dealing in shares, land or buildings or making or holding investments.
Accordingly, a pure property investment company, or one in which a substantial part of the business involved renting properties, whether commercial or residential, would be unlikely to qualify. Where developers buy property, obtain planning permission for development and then sell rather than developing the land themselves, this activity would be unlikely to qualify for relief. However, whether the business may still qualify as one which does not consist "wholly or mainly" of such activity will be a matter of degree, depending on the extent to which this is a minor or significant part of the activity carried out by the business. In such situations, specialist tax advice should be taken to determine the position on a case by case basis.
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 (also intended to increase in line with the CPI from 6 April 2030).
- 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.
Transitional rules
Transitional rules will mitigate the impact of the changes for transfers made before 30 October 2024, or in certain cases, 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?
Ideally, you should use the months before April 2026 to take advice to determine whether your business is likely to qualify for relief. If it will, you should review the structuring and other planning options available to you, to arrange valuations of your business assets, and where appropriate, to take action, whether before or after 6 April 2026. Depending on your circumstances, beneficial planning options may include one or more of the following:
- Make a Will, or if you have one already, review it to ensure it includes appropriate provisions for your business property to pass to your chosen successors as tax-efficiently as possible.
- Transfer qualifying business property to a spouse or civil partner, if appropriate. This will enable each of you to take advantage of your individual £1 million allowance, as the allowance will not be transferable between spouses or partners.
- 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.
- Consider setting up a trust before 6 April 2026. Business assets transferred into trust during this period will be free of IHT on entry, and there will be no later charge provided the settlor dies before 6 April 2026 or survives for at least 7 years after the transfer. (Note that after 6 April 2026, the trustees will be liable to IHT charges every ten years and when property leaves the trust, subject to the availability of the £1 million allowance.)
- Consider setting up a Family Investment Company (FIC) or other corporate structure to maximise the value of BPR available. 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. - Consider taking 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.
AND FINALLY
It is important to begin to plan on the basis that the changes will take place from 6 April 2026 in their existing form. However, before making any final decisions, you should take expert legal advice as to how the new rules might affect you specifically, as well as any trusts of which you are the settlor or trustee. You should also do so to ensure that no changes have been made to the proposed measures in the intervening period that may affect your plans.
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 note constitutes legal advice to any person.
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