Business property relief (BPR) can have a major impact on the inheritance tax (IHT) business owners might pay when selling a business property asset. It’s essential to understand the IHT implications and plan carefully, especially given the changes to BPR under Labour’s 2024 Autumn Budget.
BPR provides business owners with a way of transferring business property efficiently, by utilising relief rates of either 50% or 100%, depending on the type of asset.
It was introduced in 1976 as a way for family businesses with property assets to continue running the business after an owner dies, without needing to sell some or all of the business to pay the IHT owed.
Owners, partners or sole traders who run businesses with property assets need to understand how BPR works; when it applies; what impact it has on IHT, and how to plan for transfers or disposals of business property assets.
What changes to BPR are happening under Labour?
The Autumn 2024 budget did introduce changes to BPR, but most only apply from April 2026. The changes will affect how owners, especially those with large proportions of land and property assets, such as farms, pass on businesses and assets.
BPR will remain in place, but the 100% relief will only be for the first £1m of qualifying assets per estate and will be a combined limit for BPR and Agricultural Property Relief (APR).
From April 2026, property valued above £1m will face IHT at 40%, but at a 50% discounted rate (meaning an effective rate of 20%). This provides an effective tax rate of 20% on all qualifying business assets valued above £1m.
The main changes are:
- From 6 April 2026, a new £1m BPR allowance will be introduced, shared with assets that qualify for Agricultural Property Relief (APR)
- From 6 April 2026, BPR will no longer be applied at 100% relief when a business is valued above £1m
- If a business is valued above £1m, 50% of the value above £1m will not be taxed, and the other 50% will fall under IHT, and be taxed at 20%
- The £1m allowance applies to individuals. This means that married couples/civil partners get £1m each. That’s quite the incentive for married sole traders to opt for joint ownership with spouses/partners, as the individual allowance cannot be passed on
- AIM-listed shares that used to qualify for 100% BPR, will now qualify for 50% relief, for all values (an effective tax rate of 20%). This applies separately from the new £1m allowance.
What is Business Property Relief?
Business Property Relief is an inheritance tax relief that can be claimed on the value of a UK business. It reduces the amount of IHT payable on business property assets and the deceased’s taxable estate when transferred after the death of a business owner. Every person in the UK has an allowance of £325,000 before IHT is due.
Currently, BPR only applies to business interests, and does not include land, plant and machinery. That’s unless ‘relevant conditions’ apply – in which case, 50% BPR can be claimed on land, plant and machinery and the other 50% is taxed under IHT at 40%. This will change from April 2026 as detailed above.
How does it work in practice? The executor of the will or administrator of the estate claims the relief. They then need to:
- Calculate the value of the business and its assets
- Decide or take advice from a tax advisor to ascertain if the business property assets qualify for 50% or 100% of BP
- If the estate qualifies for 100%, no further action is required
- If some or all of the business property assets qualify for 50% BPR, apply for an IHT reference number from HMRC
- Then complete forms IHT 400 and IHT 412 and submit them to HMRC
- Pay any IHT due within six months of the death
Find out more: UK 2024/25 tax brackets and personal allowances
Eligibility for BPR
Understanding what may or may not qualify can be confusing. Here we break it down for you.
What assets qualify for BPR?
BPR can apply to business property assets that are passed on to beneficiaries from a deceased person’s estate or through the lifetime transfer system. The relief applies to business property assets from anywhere in the world.
Businesses receive 100% BPR for property which is itself a business or interest in a business. Alternatively, they can receive 50% BPR for buildings used wholly or mainly for business purposes that were undertaken by a company or partnership owned by the deceased – or, if the buildings were held in a trust that the business has a right to benefit from.
To qualify for BPR, the person who dies and is passing on the assets must have owned the business or asset for at least two years before they died.
What assets don’t qualify?
BPR is not available for a company that is ‘not carried on for gain’, i.e. not for profit. It is also prohibited if a business is subject to a contract for sale, or is being wound up. An exception that means BHP will be available is if the sale is to another company that will continue operating the business, and the estate will be paid mainly in shares.
BPR is also not available for assets that also qualify for Agricultural Property Relief (APR) or is not needed for future use in the business.
Types of businesses that don’t qualify
Businesses that only or mainly earn revenue from stocks or shares investments do not qualify for BPR. This includes income from property investments. An example would be a residential or commercial lettings business; a property trading company, or a serviced office business.
Some business activities operate in a grey area regarding qualifying for BPR. For instance, for property development and holiday businesses, it depends on the nature of services provided.
Key Considerations for BPR
Another qualifying criterion for BPR is the 5-year ownership rule. Businesses qualify for BPR as long as the combined ownership period for the property is for at least two out of the five years immediately before the property transfer or death.
The two-year trading rule is also a vital consideration for business owners when factoring in BPR. A property does not normally qualify for BPR unless it was owned by the business transferring the property throughout the two years before the transfer. The trading activities of the business does not have to be the same for the two years, but a business must have been operating as a going concern.
There are three exceptions:
- When the transferor became entitled to the property on the death of another person
- Where the transferred property replaced other business property
- Where the transferred property was acquired through an earlier transfer within the two-year period
Active trading requirements
Businesses need to pass the 50% trading test operated by HMRC. This means less than 50% of its activity is made up of investment activities and the majority of time is spent trading as a qualifying business.
This is an ‘all or nothing’ rule. So, if a business owner has shares in an unquoted company that operates at a ratio of 55% in a qualifying activity, and 45% in an excluded activity like investments, they would qualify for BPR in full. But, if the business activities were the other way round, it would not qualify for any BPR.
The value of the business will affect the amount of relief available from April 2026. From that point, BPR will no longer be available at 100% when a business is valued above £1m. In these instances, 50% of the value above £1m is non-taxable and the remaining 50% is subject to inheritance tax at 20%.
BPR reduces the value of an asset for tax purposes by either 50% or 100% depending on the type of asset and how it is used within the business.
BPR – an example in practice
Businesses need to work out if a business property qualifies for 50% or 100% relief under Section 104 of the Inheritance Tax Act 1984. If the qualifying conditions for BPR are met, a business receives BPR at the applicable rate.
The 100% relief only applies to an entire business or business interests and is dealt with through IHT. It does not include land, plant and machinery. If the relevant conditions are met, BPR of 50% can be claimed on land, plant and machinery and the remaining 50% is subject to IHT.
Businesses can receive significant IHT savings by applying BPR to qualifying assets. For example, a business valued at £3m with land and machinery assets valued at £150,000 and where no other reliefs are available will pay tax as follows:
The first £1m is exempt, leaving £2m above the threshold. 50% of £2m is exempt = £1m.
The other £1m will face an IHT charge at 20% = £200,000 IHT payable
Land and machinery value = £150,000. 50% of land and machinery is exempt = £75,000
This amount, £75,000, is liable for IHT @ 20% = £15,000
Post April 2026, total tax on business interests and business assets = £ 215,000.
This means before April 2026, the total tax payable on business interests and business assets for this example = £15,000
After April 2026, some UK businesses will be liable for IHT if they are valued above £1m and no other reliefs are available.
BPR can significantly reduce an estate’s IHT liability because, in some circumstances it can mean 100% of the value of the business is deducted from an IHT charge. In other circumstances, the deduction is 50%.
Find out more: Best free accounting software
Potential pitfalls and how to plan ahead
The changes to BPR will impact IHT planning for many family businesses. It is vital that owners are aware of the rules and plan ahead for tax impacts. It is sensible to take advice from a tax specialist about BPR.
Common mistakes to avoid
Claiming BPR to reduce IHT for qualifying businesses is a very complex area. How the tax and relief is applied can vary drastically depending on the nature and structure of the business.
Potential errors and mistakes include:
- Claiming for a non-qualifying business
- Not meeting the two-year ownership and trading rules
- Not meeting the ‘all or nothing’ test
- Not realising that the £1m BPR allowance can’t be transferred from one spouse to another
Effective estate planning strategies
Businesses need to carefully plan their structure to benefit best from BPR. Firstly, they should estimate any IHT liabilities from April 2026, particularly if business assets are likely to be more than £1m.
Next, consider how the assets would be distributed under the owner’s existing wills, and find out what the tax implications will be. Each partner in a business should own a share of qualifying assets to maximise allowances.
Business owners can amend their wills to ensure BPR and any other qualifying reliefs are used to reduce tax and increase the amount passed on.
Also, ensure that the surviving family members want to continue running the business, otherwise it might be more tax-efficient and provide them with a larger inheritance, if they dispose of business assets using a different tax strategy.
Find out more: How to choose an accountant
Gifting, amending wills and lifetime transfers
The rules announced in the Autumn 2024 budget apply from 30 October 2024 if the owner dies on or after 6 April 2026 This helps owners plan in advance and use the lifetime gifting of assets to lower IHT.
Gifts passed on must be survived by seven years to qualify, and gifts that have a residual value at the time of an owner’s death may not qualify.
Lifetime gifting is also useful if a business owner knows that a business definitely will not qualify for BPR. Owners can reduce IHT liability by gifting a relevant business property (RBP) at least seven years before they die. This is classified as a potentially exempt transfer (PET).
But, if an owner is certain they want to pass on the business as a lifetime gift, they must give it away in its entirety. If the owner lives longer than seven years and continues to benefit from the business, it is classed as a ‘gift with reservation or benefit,’ and is potentially liable to IHT on some or all of the value.
Using trusts to mitigate IHT
Owners with shares in a trading company that qualifies for BPR can transfer the shares into a discretionary trust with no IHT charge initially.
This strategy could be used if a sale of shares is expected and the proceeds may be liable for property tax, instead of being within the individual’s estate for IHT purposes. There could be Capital Gains Tax implications though, and it must be gifted to meet IHT reservation rules.
Conclusion
Business Property Relief is a vital component of inheritance tax planning for qualifying businesses that are passed on when an owner dies.
A new £1m BPR allowance will be introduced in April 2026, as announced in Labour’s 2024 Autumn Budget. From the same date, BPR will no longer be applied for businesses valued above £1m. In these cases, 50% of the value above £1m will not be taxed and the other 50% will fall under IHT and be taxed at 20%.
Using careful tax planning, business owners can ensure they pass on the most to their families to allow them to continue running the business in the future while limiting tax liabilities.
BPR and IHT are complex areas and bearing in mind the significance and high sums involved it is sensible to seek professional advice and consult with a tax advisor.
Benjamin Salisbury is an experienced writer, editor and journalist who has worked for national newspapers, leading consumer websites like This Is Money and MoneySavingExpert.com, business analysts including Environment Analyst, AIM Group and written articles for professional bodies and financial companies. He covers news, personal finance, business, startups and property.
