Inheritance tax - Business property relief

Learning Outcomes

After reading this article, you will be able to identify when Business Property Relief (BPR) applies to business assets for inheritance tax, distinguish between qualifying and non-qualifying businesses, explain the main exclusions, and apply the "wholly or mainly trading" test. You will also be able to answer SQE1-style MCQs on BPR scenarios and advise on practical eligibility issues.

SQE1 Syllabus

For SQE1, you are required to understand the operation and scope of Business Property Relief for inheritance tax. In your revision, focus on:

  • The definition and rates of Business Property Relief (BPR) under the Inheritance Tax Act 1984
  • The types of business property and assets that qualify for BPR
  • The "wholly or mainly trading" test and the distinction between trading and investment businesses
  • Key exclusions, including excepted assets and binding contracts for sale
  • The interaction of BPR with other reliefs, such as Agricultural Property Relief (APR)
  • Practical application to lifetime gifts and death estates

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

  1. Which of the following assets can qualify for 100% Business Property Relief on death?

    • a) Shares in an unlisted UK trading company
    • b) A controlling shareholding in a quoted investment company
    • c) Land let to a third party for investment
    • d) A partnership interest in a trading business

  2. What is the minimum period of ownership required for business property to qualify for BPR?

  3. True or false? A business that mainly holds investments in land or securities can qualify for BPR.

  4. Which relief takes priority if both Business Property Relief and Agricultural Property Relief are available on the same asset?

Introduction

Business Property Relief (BPR) is a statutory inheritance tax (IHT) relief that reduces or eliminates IHT on transfers of qualifying business assets. The purpose of BPR is to prevent the forced sale of family businesses or business assets to pay IHT, supporting business continuity. BPR can apply to both lifetime gifts and assets in the death estate, provided strict conditions are satisfied.

What is Business Property Relief?

BPR is available under the Inheritance Tax Act 1984 (IHTA 1984) and can reduce the value of qualifying business property for IHT purposes by either 100% or 50%, depending on the asset type.

Key Term: Business Property Relief (BPR) A relief from inheritance tax that reduces the taxable value of certain business assets, potentially to zero, if qualifying conditions are met.

What Qualifies for BPR?

BPR applies to specific types of business property, provided the transferor owned them for at least two years before the transfer.

Key Term: Qualifying Business Property Assets eligible for BPR, including interests in a business, shares in unlisted trading companies, and certain assets used in a business.

The main categories and rates are:

  • 100% relief for:

    • A business or an interest in a business (e.g., sole trader or partnership interest)
    • Shares in an unlisted trading company (including AIM-listed shares)
    • Unquoted securities giving control of a trading company

  • 50% relief for:

    • Controlling shareholdings in quoted trading companies (more than 50% of voting rights)
    • Land, buildings, or machinery used in a business carried on by a company controlled by the transferor or by a partnership in which the transferor was a partner

Key Term: Trading Company A company that carries on trading activities rather than mainly holding investments.

The "Wholly or Mainly Trading" Test

To qualify for BPR, the business must be wholly or mainly trading. If the business consists wholly or mainly of making or holding investments (such as property letting or securities), BPR is denied.

Key Term: Wholly or Mainly Trading Test The requirement that a business must be at least 50% trading (by reference to income, assets, activities, and management time) to qualify for BPR.

HMRC will consider all relevant factors, including:

  • Proportion of trading vs. investment income
  • Use of assets in the business
  • Time spent by management on trading vs. investment activities

If more than 50% of the business is investment, BPR is not available.

Ownership Period Requirement

The transferor must have owned the business property for at least two years before the transfer (death or gift).

Key Term: Minimum Ownership Period The two-year period for which business property must be owned before a transfer to qualify for BPR.

There are exceptions if the property replaced other qualifying business property.

Key Exclusions from BPR

Certain assets and situations are specifically excluded from BPR:

  • Investment Businesses: No BPR is available if the business mainly deals in securities, stocks, shares, land, or buildings as investments.
  • Excepted Assets: Assets not used mainly for business purposes in the two years before the transfer, or not required for future use in the business, are excluded.
  • Binding Contracts for Sale: If there is a binding contract for sale of the business or shares at the time of transfer, BPR is denied.
  • Businesses in Liquidation: BPR is not available if the business is in liquidation unless the liquidation is part of a reconstruction.

Key Term: Excepted Asset An asset held by a business that is not used wholly or mainly for business purposes, and so does not qualify for BPR.

Key Term: Binding Contract for Sale A contract that obliges the sale of business property, which prevents BPR from applying to that property.

Interaction with Agricultural Property Relief

If both BPR and Agricultural Property Relief (APR) are available on the same asset, APR takes priority. BPR may apply to any value not covered by APR.

Key Term: Agricultural Property Relief (APR) A separate IHT relief for agricultural land and buildings, which takes precedence over BPR if both apply.

Application to Lifetime Gifts and Death Estates

BPR can apply to both lifetime gifts (potentially exempt transfers or chargeable lifetime transfers) and assets in the death estate, provided the qualifying conditions are met at the relevant time.

Worked Example 1.1

Scenario:
Sophie owns 75% of the shares in an unlisted UK trading company and a portfolio of buy-to-let properties. She dies, leaving both assets to her children.

Question:
Which assets qualify for BPR and at what rate?

Answer:
Sophie's shares in the unlisted trading company qualify for 100% BPR, so no IHT is due on their value. The buy-to-let property business is an investment business, so no BPR is available on that asset.

Worked Example 1.2

Scenario:
David owns 60% of the shares in a quoted trading company and a factory used by his partnership business. He dies, leaving both assets to his spouse.

Question:
What BPR is available?

Answer:
David's controlling shareholding in the quoted trading company qualifies for 50% BPR. The factory, if used in the partnership business and owned for at least two years, also qualifies for 50% BPR.

Practical Issues and Planning

  • Lifetime Gifts: BPR can shelter gifts of business property from IHT if the donor survives seven years, but the business must still qualify at the date of death.
  • Replacement Property: If business property is sold and replaced with other qualifying property, the ownership period may be aggregated.
  • Interaction with APR: If APR applies to part of the value of an asset, BPR may apply to any excess value not covered by APR.

Exam Warning

BPR is denied if the business is mainly investment, even if some trading activity is present. Always check the main activity using all relevant factors.

Revision Tip

When answering SQE1 questions, always identify the type of business, the asset, the ownership period, and whether any exclusions apply before concluding on BPR eligibility.

Key Point Checklist

This article has covered the following key knowledge points:

  • Business Property Relief (BPR) reduces or eliminates inheritance tax on qualifying business assets.
  • 100% BPR applies to interests in a business, unlisted trading company shares, and unquoted securities giving control.
  • 50% BPR applies to controlling holdings in quoted trading companies and certain assets used in a business.
  • The business must be "wholly or mainly trading"—investment businesses do not qualify.
  • The transferor must have owned the property for at least two years before the transfer.
  • Key exclusions include excepted assets, binding contracts for sale, and investment businesses.
  • APR takes priority over BPR if both apply to the same asset.
  • BPR can apply to both lifetime gifts and death estates if conditions are met.

Key Terms and Concepts

  • Business Property Relief (BPR)
  • Qualifying Business Property
  • Trading Company
  • Wholly or Mainly Trading Test
  • Minimum Ownership Period
  • Excepted Asset
  • Binding Contract for Sale
  • Agricultural Property Relief (APR)
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