Inheritance Tax on lifetime transfers and transfers on death...

Learning Outcomes

This article outlines Business Property Relief (BPR) and Agricultural Property Relief (APR) for Inheritance Tax on lifetime transfers and transfers on death, including:

• Qualifying assets for BPR and APR; distinction between trading and investment activities
• Rates of BPR (100%/50%) and APR (100%/50%); control effects on quoted shares; treatment of personally owned assets used in a business
• Ownership and occupation requirements: two-year (BPR/APR) and seven-year (APR) tests; deemed ownership via spouses/civil partners; replacement property aggregation
• Excepted assets and apportionment in valuing company shares or partnership interests
• Restrictions: “wholly or mainly” holding investments; binding contracts for sale; assets not used for business/agriculture
• Application of BPR/APR to lifetime transfers and transfers on death; clawback conditions on disposal or cessation; rules on replacement of qualifying property
• Priority of APR over BPR; application of BPR to excess value (e.g., hope/development value); statutory allocation across residue for mixed exempt and non-exempt dispositions
• Anti-avoidance and technical rules: gifts with reservation of benefit; excepted assets; cross‑option versus binding sale agreements; debts used to finance relievable property
• Operation of BPR/APR for settled property; interests in possession and immediate post-death interests; relevance of trading status and use tests at the charge point

SQE1 Syllabus

For SQE1, you are required to understand the scope, conditions, and application of Business Property Relief (BPR) and Agricultural Property Relief (APR) within Inheritance Tax on lifetime transfers and transfers on death, with a focus on the following syllabus points:

• scope of BPR and APR, including statutory definitions of relevant business property and agricultural property
• asset categories qualifying for 100% vs 50% BPR; quoted/unquoted shares, securities conferring control, and personally owned assets used by a controlled company or partnership
• APR scope and the “character appropriate” farmhouse/cottage test; agricultural value versus market value
• ownership and occupation requirements (two-year and seven-year tests) and how replacement property rules aggregate periods
• trading requirement for BPR (not wholly or mainly holding investments); indicators used to assess “wholly or mainly”
• excepted assets and apportionment where a business holds non‑business assets or surplus cash
• binding contracts for sale versus cross‑option arrangements and their impact on BPR
• interaction of APR and BPR, including order of application and s 39A allocation across residue where partly exempt transfers occur
• application of reliefs to lifetime transfers and on death; clawback and replacement on subsequent cessations/disposals
• gifts with reservation of benefit in the business/agricultural context; inclusion on death and potential availability of BPR/APR
• debts used to finance relievable property (must reduce relievable value first)
• application of BPR/APR to settled property (pre‑2006 interests in possession/IPDIs)
• relief on AIM/unquoted trading shares; voting control and spousal aggregation for control tests

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 types of business assets qualify for 100% Business Property Relief on a transfer of value for IHT?
2. What is the minimum ownership period required for BPR or APR to apply?
3. How does Agricultural Property Relief differ from BPR in terms of the value it relieves?
4. Can both BPR and APR apply to the same asset? If so, how are they applied?
5. What is the effect of a donor reserving a benefit in business or agricultural property after making a lifetime gift?

Introduction

Inheritance Tax (IHT) is charged on the value of a person’s estate on death and on certain lifetime transfers. However, the law provides significant reliefs for business and agricultural property, recognising their economic and social importance. These reliefs—Business Property Relief (BPR) and Agricultural Property Relief (APR)—can reduce or eliminate IHT on qualifying assets, but only if strict statutory requirements are met.

Key Term: Business Property Relief (BPR)
A statutory relief that reduces the value of qualifying business assets for IHT, either by 100% or 50%, depending on the asset type.

Key Term: Agricultural Property Relief (APR)
A relief that reduces the value of qualifying agricultural property for IHT, either by 100% or 50%, depending on occupation and ownership.

Business Property Relief (BPR)

BPR is designed to prevent the forced sale of businesses to pay IHT. It reduces the value of relevant business property for IHT purposes, sometimes to zero.

Qualifying assets

BPR applies to the following assets, provided they have been owned for at least two years before the transfer (with aggregation for qualifying replacement property):

• A business or an interest in a business (100% relief)
• Shares in an unquoted trading company, including AIM shares (100% relief)
• Securities in an unquoted company which, taken together with other holdings, give voting control (100% relief)
• Shares in a quoted company giving voting control (50% relief)
• Land, buildings, or machinery owned personally and used in a business carried on by a company controlled by the transferor or by a partnership of which they are a member (50% relief)

Key Term: unquoted trading company
A company whose shares are not listed on a recognised stock exchange and which carries on trading activities, not mainly investment activities. For BPR, shares traded on AIM are treated as unquoted.

Key Term: control
The ability to exercise more than 50% of the votes on all resolutions; spouses/civil partners’ shareholdings can sometimes be aggregated when testing control.

Trading requirement

BPR is only available if the business is wholly or mainly trading. Businesses mainly holding investments, dealing in securities, or dealing in land or buildings do not qualify. “Wholly or mainly” is judged on the whole picture, typically by reference to turnover, profits, asset base, and management time. Letting activities (including furnished holiday lets without substantial services) are commonly treated as investment activities, while businesses providing substantial services linked to assets may be able to demonstrate trading.

Key Term: trading business
A business that is not mainly engaged in investment activities, but in providing goods or services for profit.

Ownership period

To claim BPR, the transferor must have owned the asset for at least two years before the transfer. Where qualifying property is replaced by other qualifying property, the periods of ownership can be aggregated so that the combined period is at least two years. On death, periods of ownership by a predeceased spouse or civil partner can be “inherited” for the ownership test. This deemed ownership does not apply to lifetime transfers between spouses/civil partners.

Key Term: replacement property
Later-acquired property that “replaces” earlier relevant business property so that periods of ownership can be aggregated for the two-year test, subject to statutory conditions.

Rates of relief (BPR)

• 100% relief: for a business, an interest in a business, shares in an unquoted trading company, and securities in an unquoted company giving control
• 50% relief: for shares in a quoted company giving control, or for land, buildings, or machinery owned personally but used by a controlled company or by a partnership of which the transferor is a member

Restrictions and exceptions

BPR is not available for:

• Businesses mainly holding investments
• Assets not used for business purposes in the last two years, or not required for future use
• Assets subject to a binding contract for sale at the time of transfer
• Property used by a company the transferor does not control (for personally owned assets), or by a partnership of which they are not a member

Key Term: excepted asset
An asset held by a business that is not used wholly or mainly for business purposes in the two years before transfer, or not required for future use in the business. The value attributable to excepted assets within a share/partnership interest does not qualify for BPR and must be excluded.

Key Term: binding contract for sale
A legally enforceable agreement to sell relevant business property. If in place at the time of transfer, BPR is denied. A cross‑option arrangement is not a binding contract for sale.

Key Term: cross‑option arrangement
An arrangement where either party has an option to buy/sell on death but neither is obliged to exercise it. Unlike a binding sale agreement, a cross‑option does not of itself deny BPR.

Excepted assets often include surplus cash and investments not needed for trading. Where a company or partnership holds such assets, the value attributable to them is carved out before applying BPR. Importantly, cash retained to meet short‑term working capital needs or planned trading expenditure is not “surplus.”

Worked Example 1.1

A owns 100% of the shares in an unquoted trading company. He dies, leaving the shares to his daughter. The company owns a rental property not used in the trade.

Answer:
The shares qualify for 100% BPR, but the value attributable to the rental property is an excepted asset and does not qualify for relief.

Additional illustrations and typical pitfalls

• Personally owned trading premises: Where an individual owns a workshop personally and it is used by their controlled trading company, 50% BPR can apply on the premises. If the company is not controlled by the owner (e.g., only a minority holding), BPR on the premises is not available.
• Binding sale versus cross‑option: A pre‑agreed buy‑sell contract over shares will block BPR if the contract is binding at death. A properly drafted cross‑option avoids this outcome.

Worked Example 1.2

D and E each own 50% of the shares in a private trading company. Their shareholder agreement compels the survivor to buy the other’s shares on death, at a pre-agreed formula price.

Answer:
The compulsory buy-sell agreement is a binding contract for sale. If D dies, BPR on D’s shares is denied. Had they used a cross‑option (either party may, but need not, require a sale), BPR would not have been denied solely on that basis.

Application to lifetime transfers and death

BPR applies to both lifetime transfers and transfers on death. For lifetime gifts, relief can be “clawed back” if conditions fail on the donor’s death within seven years. In broad terms:

• If the donor makes a PET/CLT of business property and dies within seven years, BPR will be re-tested at the donor’s death. Relief given at the time of the gift is withdrawn unless, at the donor’s death, the donee still owns the relevant business property (or qualifying replacement property) and it still qualifies.
• If the donee disposes of the asset before the donor’s death but acquires qualifying replacement property (subject to statutory timing and aggregation rules), relief may be preserved.

A donee’s cessation of qualifying use or sale without replacement can trigger clawback. The claim and retention conditions should be checked on any subsequent changes.

Worked Example 1.3

F gives her 30% holding in an unquoted trading company (qualifying for 100% BPR) to her son, then dies five years later. Two years after receiving the gift, the son sells the shares and parks the proceeds in a general investment portfolio.

Answer:
On F’s death within seven years, BPR is re-tested. Because the son no longer owns qualifying property (and did not replace it with qualifying business property), BPR on the earlier transfer is withdrawn. The PET becomes chargeable using the value at the date of the gift.

Agricultural Property Relief (APR)

APR is intended to keep farms and agricultural land in production by reducing or eliminating IHT on their agricultural value.

Key Term: agricultural value
The value the property would have if used only for agricultural purposes, ignoring any development or non‑agricultural potential.

Qualifying property

APR applies to:

• Agricultural land or pasture in the UK (including the Channel Islands/Isle of Man) and certain related territories per statute
• Farmhouses, cottages, and buildings of a character appropriate to the agricultural land with which they are occupied
• Property used for agricultural purposes, including market gardening and certain ancillary buildings

The farmhouse or cottage must be occupied with the land and be of a character appropriate (i.e., proportionate in size, nature and function to the farming enterprise) and usually the centre of farming operations.

Key Term: character appropriate
A test focusing on whether the house/building is proportionate to and functionally connected with the agricultural land and its farming use.

Rates of relief (APR)

• 100% relief:
  • where the transferor had the right to vacant possession immediately before the transfer (or the right to obtain it within a specified period), or
  • where land is let on a tenancy commencing on or after 1 September 1995, and
  • provided the occupation/ownership conditions are met
• 50% relief: for other qualifying situations (e.g., some older tenancies without vacant possession rights), provided occupation/ownership conditions are met

Occupation and ownership requirements

The property must have been:

• Occupied by the transferor for agricultural purposes for at least two years before transfer, or
• Owned by the transferor for at least seven years before transfer and occupied for agriculture throughout that period by the transferor or another

Periods of ownership/occupation by a predeceased spouse/civil partner can count towards the test. Cottages and farmhouses must be occupied for agriculture (e.g., by a working farmer or farm worker) to qualify.

Restrictions

APR does not apply to:

• Land used for non-agricultural purposes (e.g., development, equestrian livery without agricultural connection, sporting rights)
• Any value above the agricultural value (e.g., development “hope value”)
• Farmhouses/cottages not of a character appropriate to the land, or no longer used/occupied for agricultural purposes

Worked Example 1.4

B owns a farm and farmhouse, which she lets to a tenant farmer. She has owned the property for eight years. The farmhouse is used by the tenant as their main residence.

Answer:
The land and farmhouse qualify for 100% APR, as B has owned the property for at least seven years and it is occupied for agriculture.

Worked Example 1.5

G owns 200 acres and a large house. Farming has been contracted out for 10 years; G lives in the house and no longer participates in farm management.

Answer:
APR is likely available on the agricultural value of the land (subject to the seven‑year ownership/occupation test), but the large house may fail the “character appropriate” and occupancy for agriculture requirements if it is disproportionate and not occupied for agricultural purposes. Relief on the house could be denied.

Application to lifetime transfers and death (APR)

APR applies to both lifetime gifts and transfers on death. For lifetime gifts, if the donor dies within seven years, APR is re-tested. Relief given at the time of the transfer may be withdrawn unless, at the donor’s death:

• the donee still owns qualifying agricultural property and it still qualifies (occupation/character appropriate tests), or
• qualifying replacement agricultural property has been acquired and statutory aggregation conditions are met.

If the donee sells or ceases agricultural use within the relevant period without replacement, APR can be clawed back.

Interaction between BPR and APR

Sometimes both reliefs may be available, but APR takes priority. BPR may apply to any value not covered by APR (such as development or “hope” value), provided the business requirements are met.

Worked Example 1.6

C owns land used for farming, but part of the value is due to hope value for future development. APR applies to the agricultural value, but not to the hope value.

Answer:
APR is applied first to the agricultural value. If the business as a whole qualifies, BPR may be available on the excess value (hope value).

In estates where some dispositions are exempt (e.g., to a spouse) and some are not, and the estate includes assets qualifying for APR/BPR, statute allocates the benefit of reliefs consistently across the estate. In particular, where qualifying assets pass under residue, the effect of APR/BPR is apportioned across the residuary gifts rather than being confined to a particular item unless there is a specific gift of qualifying property.

Worked Example 1.7

H’s estate is £1m, including an agricultural farm worth £600,000 (agricultural value) qualifying for APR at 100%. H leaves a £200,000 pecuniary legacy to a friend and the residue to a spouse.

Answer:
APR relief reduces the estate’s relievable value. Under the statutory allocation formula for partly exempt estates, the reduction in value from APR is apportioned across the transfers comprising residue. The relief does not attach solely to the residuary spouse’s share unless the farm is specifically bequeathed. Planning point: specific gifts of APR/BPR assets to non-exempt beneficiaries can maximise the benefit of those reliefs.

Technical requirements and anti-avoidance

Ownership and replacement property

For BPR and APR the key time requirement is two years (BPR) and two or seven years (APR) depending on occupation/ownership. Where qualifying property is replaced, periods of ownership can be aggregated so long as statutory conditions are met and the combined period equals the required minimum. On death, periods of ownership by a predeceased spouse/civil partner can count in many cases.

Excepted assets and business investment activities

The excepted asset rule restricts BPR for shares/partnership interests by excluding value attributable to assets not used in the business or not required for future use. Investment businesses (e.g., holding land for rent) do not qualify for BPR at all. For mixed businesses, the “wholly or mainly” test is applied by looking at a balanced set of indicators (assets, management time, turnover, and profit split).

Reservation of benefit

If the donor continues to benefit from the property after a lifetime gift (e.g., continues to live in a farmhouse rent‑free), the gift is treated as ineffective for IHT, and the property remains in the donor’s estate.

Key Term: gift with reservation of benefit
A gift where the donor retains some benefit from the property after the transfer, causing the asset to remain in the donor’s estate for IHT.

Where a gift with reservation brings the property back into charge on death, BPR/APR may still be available at death if the property otherwise qualifies at that time (e.g., the farm is in agricultural use and the farmhouse meets the tests). The reliefs are tested on the facts at the charge point.

Anti-avoidance and clawback

If the donee sells or ceases to use the property for qualifying purposes within seven years of the transferor’s death, relief may be withdrawn. For BPR, relief is also withdrawn if at the donor’s death the donee no longer owns qualifying business property (and has not replaced it). For APR, similar re-tests are applied to ownership, occupation, and character appropriate conditions.

Debt-financed acquisitions of relievable property

A liability which finances the acquisition, maintenance or enhancement of relievable property (APR/BPR) is, in effect, set first against the relievable property before it can reduce the taxable value of other assets. The policy is to prevent the use of borrowing to “shift” value out of charge where substantial APR/BPR is expected. In addition, liabilities financing excluded property or certain overseas property can be restricted.

Worked Example 1.8

J borrows £450,000 secured on her home to acquire AIM shares later qualifying for 100% BPR. At death the AIM shares are worth £575,000; the rest of her estate is £1.5m, and the mortgage is still £450,000.

Answer:
The borrowing is attributable to acquiring relievable property, so the debt reduces the value attributable to the AIM shares first. BPR applies only to the net amount after the debt is set against the AIM shares to the extent required by statute.

Binding contracts for sale and share protection

As above, a binding contract for sale in place at the date of transfer denies BPR. Cross‑options (i.e., mutual options exercisable on death) are commonly used in shareholder protection planning to avoid a binding obligation to sell while still enabling post‑death business continuity and funding.

Group and holding companies

Shares in a holding company of a group that is “wholly or mainly” trading can qualify for BPR. The trading test is applied at group level. Excepted asset rules still apply and surplus non‑business assets can reduce relief.

Settled property

On the death of a beneficiary with a qualifying interest in possession (e.g., an immediate post‑death interest), the business or agricultural property held in the trust is tested for BPR/APR as if it were comprised in the deceased’s estate. Relief may be available if the trust assets meet the trading/use and ownership/occupation conditions at death.

Practical planning points

• Avoid binding sale contracts over shares/property to preserve BPR; use cross‑options instead.
• Keep surplus non‑trading assets (e.g., investment portfolios) outside trading companies to minimise excepted assets.
• Where both exempt and non-exempt beneficiaries are to benefit, consider specifically bequeathing APR/BPR assets to non-exempt beneficiaries to use relief efficiently; otherwise relief may be spread across residue by statute.
• Monitor borrowing used to acquire APR/BPR assets; expect debt to reduce relievable value first.
• In lifetime planning, ensure donees retain qualifying property (or replace it with qualifying property) until the donor’s seven-year window has passed, to prevent clawback.

Worked Example 1.9

K personally owns a warehouse used by her 100%-controlled trading company. She dies leaving the warehouse to a friend and the shares to her spouse. The warehouse was used for trading for many years.

Answer:
The warehouse should attract 50% BPR (personally owned asset used by a controlled company). The shares (passing to a spouse) are exempt in any event, so BPR on the warehouse is the meaningful relief. If the company also held a large portfolio of surplus investments, any excepted asset value would have to be carved out of the share valuation, but would not affect BPR on the personally owned warehouse.

Worked Example 1.10

L’s residuary estate is divided equally between a child and a charity. It includes a trading company worth £800,000 (subject to 100% BPR) and other assets of £400,000.

Answer:
The BPR reduces the value transferred by the company shares to nil for IHT. The relief’s effect is apportioned across the residue under the statutory allocation rules, benefiting both the charitable and non-charitable shares of residue pro rata unless there is a specific gift of the shares. A specific bequest of the shares to the child would concentrate the BPR benefit on the non-exempt beneficiary.

Exam Warning

For SQE1, be careful to distinguish between the asset types and rates for BPR and APR. Always check the business is trading, not investment, and confirm the correct ownership period. Do not assume relief applies to the full market value—APR is limited to agricultural value.

Key Point Checklist

This article has covered the following key knowledge points:

• BPR reduces value transferred by relevant business property at 100% or 50% depending on the asset; APR reduces the agricultural value of agricultural property at 100% or 50% based on occupation, ownership, and tenancy status.
• BPR applies only to trading businesses, not those mainly holding investments; apply the “wholly or mainly” test across profits, turnover, assets, and management time.
• Excepted assets (e.g., surplus cash/investments not used for trading) within share/partnership valuations are carved out before BPR is applied.
• Ownership/occupation rules: two-year ownership for BPR; two‑year occupation or seven‑year ownership with occupation for APR; replacement property rules can aggregate periods; some spousal periods may be attributed on death.
• Binding contracts for sale deny BPR; cross‑options typically do not. Control is necessary for BPR on personally owned assets used by a company and for 50% BPR on quoted shares.
• APR is limited to agricultural value; BPR may cover any excess (e.g., development “hope value”) where trading requirements are met; APR is applied first.
• Reliefs apply on lifetime transfers and on death; for lifetime gifts, BPR/APR can be clawed back if conditions are not satisfied at the donor’s death within seven years unless qualifying replacement property is held.
• Debts used to finance relievable property reduce the value of that relievable property first before reducing other assets.
• Reliefs can be available for settled property on the death of a life tenant (e.g., IPDI) if the trust assets meet qualifying conditions at the charge date.
• Planning should consider the statutory allocation of relief across residue and efficient placement of APR/BPR assets with non-exempt beneficiaries.

Key Terms and Concepts

• Business Property Relief (BPR)
• unquoted trading company
• trading business
• excepted asset
• Agricultural Property Relief (APR)
• agricultural value
• gift with reservation of benefit
• control
• binding contract for sale
• cross‑option arrangement
• replacement property
• character appropriate