Learning Outcomes
This article outlines Business Property Relief (BPR) for inheritance tax, including:
- Asset categories attracting 100% or 50% BPR, the statutory qualification criteria for each, and how to determine the correct rate in SQE1-style scenarios.
- The “wholly or mainly trading” test, practical indicators for distinguishing trading from investment businesses, and the impact of mixed or borderline activities on relief.
- The two-year minimum ownership requirement, including aggregation of periods for replacement property and spouse/civil partner carry-over where business assets pass on death.
- Main exclusions from BPR: excepted assets, binding contracts for sale, investment businesses, and businesses in liquidation, with emphasis on how these appear in problem questions.
- Control requirements for quoted company shares and the conditions under which personally owned land, buildings, and machinery can qualify as relevant business property.
- The interaction between Agricultural Property Relief (APR) and BPR, how APR takes priority, and how reliefs can be layered on the same asset.
- The application of BPR to lifetime gifts (PETs and CLTs) and death estates, including retention and replacement property rules that can preserve or claw back relief.
- A structured SQE1 answer framework for assessing BPR eligibility: asset type, business status, ownership period, control, business use, exclusions, and interaction with APR or other reliefs.
SQE1 Syllabus
For SQE1, you are required to understand Business Property Relief (BPR) for inheritance tax, with a focus on the following syllabus points:
- 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
- Control thresholds for quoted company shareholdings and how spouse/civil partner holdings may be aggregated
- Replacement property and retention conditions for lifetime transfers
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.
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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
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What is the minimum period of ownership required for business property to qualify for BPR?
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True or false? A business that mainly holds investments in land or securities can qualify for BPR.
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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. It is designed to ensure that trading businesses and assets used in trading activities can pass without an IHT charge that would otherwise jeopardise ongoing operations.
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.
Two practical points help anchor the relief:
- Relief applies to the value “attributable to” relevant business property. Where part of the value consists of excepted assets (for example, surplus cash not required for trading), BPR is restricted to the remainder.
- Relief is generally assessed at the time of the transfer of value. For death, this is immediately before death. For lifetime transfers, specific retention and replacement rules may affect relief if the transfer later becomes chargeable (for example, a PET where the donor dies within seven years).
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:
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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
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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
- Land, buildings or machinery held on trust and beneficially entitled to the transferor, used wholly or mainly for the transferor’s business immediately before the transfer
Key Term: Trading Company
A company that carries on trading activities rather than mainly holding investments.
Control and use are critical:
- Control of a quoted company means the ability to exercise more than 50% of the votes on all resolutions. In some cases, spouses or civil partners’ holdings may be aggregated for control tests where legislation permits.
- Personally owned assets (e.g., a factory) can qualify at 50% where they were used “wholly or mainly” in the transferor’s business or by a company the transferor controlled. The use must be business use, not personal or investment use.
Unlisted vs quoted shares:
- Unlisted (including AIM) shares in trading companies attract 100% BPR.
- Quoted trading shares only attract BPR where the transferor has voting control; otherwise, no BPR.
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.
The test is assessed in the round. HMRC will consider all relevant factors, including:
- Proportion of trading vs investment income (for example, turnover from selling goods/services compared to rental or interest income)
- Asset composition (what proportion of the balance sheet is trading plant, stock, debtors, etc., versus investment properties, surplus cash or securities)
- The nature of activities (day-to-day operations selling goods/services vs passive holding of investments)
- Time spent by management on trading vs investment activities
If more than 50% of the business is investment, BPR is not available. Typical non-qualifying businesses include property investment companies and businesses mainly dealing in securities or land as investments. Conversely, actively run businesses such as manufacturers, retailers, professional firms, hospitality operators (e.g., hotels), and developers (where activity is trading rather than passive holding) can qualify.
Borderline cases require careful analysis:
- A mixed business with trading and investment arms will fail if the investment side predominates on the factors above.
- Holding companies of trading groups may qualify where their main function is the trading group’s activities, not investment holding. However, substantial non-trading assets or income can tip the balance.
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.
Key points:
- Replacement property: If the property replaced other qualifying relevant business property, ownership periods can be aggregated to meet the two-year requirement.
- Spouse/civil partner succession: Where property passes on death to a spouse or civil partner, the survivor is generally deemed to have owned the property from the date the deceased acquired it, helping meet the two-year test for a subsequent transfer.
- Different assets, same business: For example, a partner who replaced their partnership interest with shares on incorporation may aggregate ownership periods across the relevant business property categories, provided the continuity conditions are met.
In lifetime contexts:
- For chargeable lifetime transfers (CLTs), relevant business property must be held for the two-year period at the date of transfer.
- For potentially exempt transfers (PETs) that become chargeable because the donor dies within seven years, relief is determined by reference to the property transferred and the conditions met at the date of the transfer. Relief can be withdrawn if certain retention and use conditions fail before the donor’s death, although replacement property rules may preserve relief.
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. BPR is restricted to value excluding the excepted assets.
- 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 because the relevant interest is treated as an interest in sale proceeds (cash), which is not relevant business property.
- Businesses in Liquidation: BPR is not available if the business is in liquidation unless the liquidation is part of a genuine reconstruction or reorganisation where trading continues and relief conditions remain satisfied.
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.
Practical implications:
- Surplus cash balances, investment portfolios on corporate balance sheets, or personally owned buildings not used in the business will be carved out as excepted assets. Relief applies to the residual business value only.
- Pre-emption rights, option agreements or shareholder arrangements that do not create a binding contract at death can preserve BPR. Drafting buy/sell arrangements as options rather than binding obligations is standard planning to avoid denial of BPR.
- Ensure property is demonstrably “used wholly or mainly” for the business. Dual-purpose assets (e.g., part business, part private) may require apportionment and could leave a portion as an excepted asset.
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.
APR covers the agricultural value of qualifying land and buildings used for agriculture. Where the asset has a value above its agricultural value (for example, hope value or non-agricultural business use), BPR can often shelter that excess if the business itself qualifies and the asset is used in that business. Take care to identify the component values:
- APR applies first to agricultural value.
- BPR may then apply to the remaining business value if conditions are satisfied, provided there is no binding contract for sale and no excepted asset restriction.
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.
For lifetime transfers:
- PETs: If the donor survives seven years, no IHT arises and BPR is not needed. If the donor dies within seven years, the PET becomes chargeable as if it had been a chargeable transfer at the date of the gift; BPR is assessed by reference to the conditions at the gift date. Relief may be withdrawn if the transferee has disposed of the relevant business property or it has ceased to qualify before death, subject to replacement rules.
- CLTs: For transfers into, for example, discretionary trusts, BPR can reduce the value of the transfer immediately if conditions are met at the date of transfer. Relief can be clawed back if within the prescribed period after transfer the trustees dispose of the property or it ceases to qualify, subject to replacement property provisions.
For death estates:
- Relief is determined immediately before death. Consider excepted assets, investment business exclusions and any binding sale contracts.
- Spouse/civil partner exemption applies first; BPR is considered on any transfers not covered by the spouse/civil partner exemption.
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.
Worked Example 1.3
Scenario:
Amira owns 40% of the shares in an unlisted trading company. The company’s balance sheet includes £800,000 trading assets and £300,000 surplus cash not needed for working capital. Amira dies leaving her shares to a child.
Question:
How do excepted assets affect BPR?
Answer:
The shares qualify in principle for 100% BPR, but surplus cash is an excepted asset. Relief is restricted so that BPR applies only to the value attributable to trading assets. The proportion attributable to surplus cash does not benefit and is chargeable to IHT.
Worked Example 1.4
Scenario:
Ben gifts his 30% interest in a trading partnership to his daughter (a PET). He dies four years later. The daughter sold the interest two years after the gift and bought shares in the successor trading company carrying on the same business.
Question:
Is BPR preserved?
Answer:
For PETs that become chargeable, BPR is assessed at the date of the gift. If the donee disposes of the property before the donor’s death, relief may be withdrawn unless qualifying replacement relevant business property is acquired and held. Here, replacing the partnership interest with relevant shares in the successor trading company can preserve relief, provided the replacement property is held and qualifies at the relevant times.
Worked Example 1.5
Scenario:
Priya and Arun are spouses. Priya owned 55% of a quoted trading company for three years, and dies bequeathing all shares to Arun. Arun dies six months later leaving the shares to adult children.
Question:
Do the two-year ownership rules block BPR?
Answer:
No. On the second death, Arun is treated as having owned the shares from the date Priya acquired them. The combined period exceeds two years. Provided the company is a trading company and Arun had control (over 50% of votes) immediately before death, 50% BPR applies.
Practical Issues and Planning
- Lifetime Gifts: PETs of relevant business property can be made without an immediate IHT charge. If the donor survives seven years, no IHT arises. If death occurs within seven years, BPR is assessed at the gift date and may be lost if the donee disposes of the property or it ceases to qualify before death, unless replacement property is acquired and held. For CLTs into trust, test BPR at the transfer date and consider trustees’ retention and replacement obligations to avoid clawback.
- Replacement Property: Aggregation and replacement rules support continuity where business assets are sold and replaced with other relevant business property. Keep records of acquisition and disposal dates and ensure the replacement is qualifying and held for the required periods.
- Control for Quoted Shares: The control threshold is more than 50% of votes on all resolutions. Establish this before concluding that 50% BPR applies. Where relevant, consider whether spouse/civil partner holdings can be treated jointly for control purposes.
- Excepted Assets Management: Minimise surplus non-trading assets on corporate balance sheets before death or lifetime transfer to maximise BPR. Excess cash not required for trading, investment portfolios and non-business land in the company reduce or eliminate relief.
- Binding Sale Arrangements: Avoid binding contracts for sale (for example, compulsory buy/sell clauses on death) that would convert business interests into sale proceeds at death. Use options or pre-emption rights to balance succession planning with BPR preservation.
- Liquidation and Reconstruction: Relief is not available where a company is in liquidation at transfer unless the liquidation is part of a bona fide reconstruction and the trading business continues. Timing can be critical when restructuring.
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.
Additional caution:
- Relief on quoted shares depends on control. A substantial but non-controlling quoted stake attracts no BPR.
- Excepted assets reduce relief even where the overall business is trading. Identify and remove surplus non-trading assets early in planning.
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.
Also:
- Confirm whether the transfer is on death, a PET, or a CLT; timing determines which conditions are tested and whether retention/replacement rules matter.
- For assets used in a business, verify actual business use and the controlling relationship between the owner and the business entity.
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; replacement property and spouse/civil partner carry-over rules can help meet this requirement.
- Key exclusions include excepted assets, binding contracts for sale, investment businesses, and businesses in liquidation (unless part of a reconstruction).
- Excepted assets on the balance sheet restrict BPR to value attributable to trading use.
- APR takes priority over BPR if both apply to the same asset; BPR may shelter any excess value.
- BPR can apply to both lifetime gifts and death estates if conditions are met; retention and replacement rules can preserve relief for lifetime transfers.
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)