Inheritance tax - Eligibility criteria

Learning Outcomes

After studying this article, you will be able to identify when inheritance tax (IHT) applies, explain the main eligibility criteria for IHT and business property relief (BPR), and apply the rules to typical SQE1 scenarios. You will understand the nil-rate band, the requirements for BPR, and how these interact with business and agricultural assets. You will also be able to spot common traps and advise on basic planning strategies relevant to the SQE1 exam.

SQE1 Syllabus

For SQE1, you are required to understand the eligibility criteria for inheritance tax and business property relief, including their practical application in estate planning. In your revision, focus on:

  • The circumstances in which IHT is chargeable on death and on lifetime transfers.
  • The operation and calculation of the nil-rate band and residence nil-rate band.
  • The eligibility requirements for business property relief (BPR) and agricultural property relief (APR).
  • The types of property and businesses that qualify for relief.
  • The effect of lifetime gifts and the seven-year rule.
  • The interaction between IHT and other taxes (e.g., capital gains tax).
  • The main exemptions and reliefs available for business and agricultural assets.

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. What is the current nil-rate band for inheritance tax, and how does it apply to spouses or civil partners?
  2. Which of the following assets may qualify for 100% business property relief? a) Shares in a quoted investment company b) Shares in an unquoted trading company c) A buy-to-let residential property d) An interest in a partnership carrying on a trading business
  3. True or false? A binding contract for the sale of a business will prevent business property relief from applying.
  4. How long must a person have owned a business asset before it can qualify for business property relief?

Introduction

Inheritance tax (IHT) is a tax charged on the value of a person's estate when they die, and in some cases on certain gifts made during their lifetime. The eligibility criteria for IHT and the main reliefs—especially business property relief (BPR)—are essential for SQE1. This article explains the main rules, key terms, and common scenarios you may encounter in the exam.

Inheritance Tax: Basic Eligibility

IHT is generally payable on the value of a deceased person's estate above a certain threshold, known as the nil-rate band. It may also apply to certain gifts made during a person's lifetime, depending on the timing and nature of the gift.

Key Term: inheritance tax (IHT)
A tax charged on the value of a person's estate on death, and on certain lifetime transfers, subject to exemptions and reliefs.

The Nil-Rate Band

The nil-rate band is the threshold up to which no IHT is charged. The standard nil-rate band is currently £325,000 per individual. Any value above this threshold is usually taxed at 40% on death.

Key Term: nil-rate band
The amount of an estate that is not subject to IHT, currently set at £325,000 per person.

Transferable Nil-Rate Band

If a person leaves their estate to their spouse or civil partner, any unused nil-rate band can be transferred to the survivor, potentially doubling the threshold to £650,000.

Residence Nil-Rate Band

An additional residence nil-rate band may apply if a main residence is left to direct descendants (children, grandchildren, etc.). This allowance is currently up to £175,000, but is tapered for estates exceeding £2 million.

Key Term: residence nil-rate band
An extra IHT allowance for estates passing a main residence to direct descendants, subject to tapering for large estates.

Lifetime Gifts and the Seven-Year Rule

Certain gifts made during a person's lifetime may be subject to IHT if the donor dies within seven years of making the gift. These are known as potentially exempt transfers (PETs). If the donor survives seven years, the gift is exempt from IHT.

Key Term: potentially exempt transfer (PET)
A lifetime gift that is exempt from IHT if the donor survives seven years from the date of the gift.

Business Property Relief (BPR): Eligibility Criteria

Business property relief is a key relief that can reduce or eliminate IHT on the transfer of qualifying business assets, either on death or on certain lifetime gifts.

Key Term: business property relief (BPR)
A relief from IHT that reduces the value of qualifying business assets for IHT purposes, often by 100% or 50%.

Qualifying Conditions for BPR

To qualify for BPR, the following main conditions must be met:

  • The asset must be relevant business property (see below).
  • The deceased (or donor) must have owned the asset for at least two years before the transfer.
  • The business must be a trading business, not mainly an investment business.
  • There must be no binding contract for sale at the time of transfer.

Key Term: relevant business property
Assets that may qualify for BPR, including shares in unquoted trading companies, interests in partnerships, and certain business assets.

Levels of Relief

  • 100% BPR applies to:
    • A business or interest in a business (e.g., sole trader or partnership interest).
    • Shares in an unquoted trading company (including AIM-listed companies).
  • 50% BPR applies to:
    • Shares in a quoted company where the transferor had control.
    • Land, buildings, or plant and machinery used in the business but owned personally and used by a company or partnership controlled by the transferor.

Trading Requirement

The business must be wholly or mainly trading (i.e., more than 50% of its activities are trading, not investment).

Key Term: trading business
A business whose main activity is trading goods or services, not holding investments.

Ownership Period

The asset must have been owned for at least two years before the transfer (death or gift).

Binding Contract for Sale

If there is a binding contract for sale of the business or shares at the time of transfer, BPR will not apply.

Excluded Assets

BPR does not apply to:

  • Businesses or shares dealing mainly in securities, stocks, land, or buildings as investments.
  • Assets not used in the business in the two years before transfer.
  • Assets subject to a binding contract for sale.

Lifetime Transfers and BPR

BPR can apply to lifetime gifts of business assets, provided the donor survives seven years and the asset still qualifies at the time of death if the donor dies within seven years.

Interaction with Agricultural Property Relief (APR)

Agricultural property relief (APR) may apply to agricultural land and buildings. APR and BPR can sometimes be claimed together, but APR is claimed first.

Key Term: agricultural property relief (APR)
A relief from IHT for agricultural land and buildings, reducing their value for IHT purposes.

Key Term: hold-over relief
A capital gains tax relief allowing deferral of gains on certain gifts of business assets.

Worked Example 1.1

Worked Example 1.1

Aisha owns 80% of the shares in an unquoted trading company and has held them for five years. She dies, leaving the shares to her daughter. The company is not an investment company. Will business property relief apply to reduce the inheritance tax on the shares?

Answer: Yes. The shares are in an unquoted trading company, Aisha owned them for more than two years, and there is no binding contract for sale. 100% business property relief will apply, so the shares will be exempt from IHT.

Worked Example 1.2

Worked Example 1.2

Ben owns a commercial property personally and rents it to his own trading company. He has owned the property for three years. On his death, can business property relief apply to the property?

Answer: Yes, provided the company is a trading company and Ben controls it. The property is used in the business and owned for more than two years. 50% business property relief may apply.

Worked Example 1.3

Worked Example 1.3

Clara gives her partnership interest in a trading business to her son. She survives for ten years after the gift. What is the IHT position?

Answer: The gift is a potentially exempt transfer. As Clara survives seven years, the gift is exempt from IHT. Business property relief would have applied if she had died within seven years, provided the partnership interest still qualified at her death.

Exam Warning

Exam Warning For SQE1, be careful to distinguish between trading businesses (which may qualify for BPR) and investment businesses (which do not). Also, remember that a binding contract for sale will prevent BPR from applying.

Revision Tip

Revision Tip When answering SQE1 questions, always check the two-year ownership rule and whether the business is mainly trading. Watch for mixed-use businesses and ensure you apply the correct percentage relief.

Key Point Checklist

This article has covered the following key knowledge points:

  • The nil-rate band is the threshold up to which no IHT is charged; currently £325,000 per person.
  • The residence nil-rate band may provide an additional allowance for passing a main residence to direct descendants.
  • Business property relief (BPR) can reduce or eliminate IHT on qualifying business assets.
  • To qualify for BPR, the business must be mainly trading, the asset must be owned for at least two years, and there must be no binding contract for sale.
  • BPR applies at 100% or 50% depending on the type of asset.
  • Agricultural property relief (APR) may also apply to agricultural land and buildings.
  • Lifetime gifts of business assets may qualify for BPR if the donor survives seven years and the asset still qualifies at death.

Key Terms and Concepts

  • inheritance tax (IHT)
  • nil-rate band
  • residence nil-rate band
  • potentially exempt transfer (PET)
  • business property relief (BPR)
  • relevant business property
  • trading business
  • agricultural property relief (APR)
  • hold-over relief
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