Business Property Relief (BPR) is a way to reduce inheritance tax on business assets. Here’s what BPR is, who can qualify and how you can save tax.

Quick Facts

• Business Property Relief (BPR) reduces inheritance tax on qualifying business assets by 100% on the first £1 million and 50% on anything above that.
• Businesses must be trading and meet specific criteria on ownership periods, types of business and trading activities.
• Planning and knowledge of the rules around BPR is key for business owners to get the tax benefits and a smooth transition of assets.

What is Business Property Relief?

Business Property Relief (BPR) was designed to help business owners reduce their inheritance tax bill so that the fruits of their labour can be passed on to future generations. The aim of BPR is to reduce inheritance tax on certain business assets so family businesses and private investors can benefit. Relevant business property includes certain business-related assets that qualify for inheritance tax relief.

Since the 1976 Finance Act this relief has been tweaked to give more and more benefits, the current rate of relief for the first £1 million of business property is 100%. For amounts over £1 million the rate drops to 50% which is still a big tax saving.

The Autumn Budget 2024 will maintain this structure so qualifying business assets will get 100% relief on the first £1 million and 50% thereafter. So BPR is an important part of inheritance tax planning especially for those with large business interests.

Who qualifies for BPR

Not all businesses qualify for Business Property Relief. To qualify the business must be a private limited company, a limited liability partnership or an unquoted company transferring the entire business. So most family businesses fall under BPR provided they meet the rules. But note that investment companies, not for profit organisations and businesses dealing in investments or in liquidation do not qualify for this relief. Business property relief applies to those that meet the above criteria.

Properties must be used wholly or mainly for the purposes of a business carried on by a company or partnership to qualify for BPR.

Also the business must not be in the process of being wound up or amalgamated. So only trading businesses can benefit from BPR. So knowing what type of business you have and meeting these rules is key to BPR planning.

Ownership Period

One of the main requirements for Business Property Relief is the ownership period. Generally the business assets must have been owned by the deceased for at least 2 years before their death to qualify for relief. This 2 year period ensures that only long held business interests benefit from the relief and not last minute transfers to avoid inheritance tax.

There are exceptions to this rule. If a transferor inherits property from a deceased spouse or civil partner the ownership period is counted from when the deceased originally acquired the asset so the continuity of ownership is maintained.

Testamentary transfers between spouses can also preserve the ownership period so the relief is maintained even if the business changes hands on death.

Business Assets that qualify for BPR

Knowing which business assets qualify for Business Property Relief is key to tax planning. 100% relief is available for ownership of a business or unquoted company shares. So family businesses and shares in companies not listed on a recognised stock exchange can benefit fully from BPR and get a big tax saving.

For other assets such as land, buildings or machinery used in the business excepted assets get 50% relief which is the normal rate. These assets must be owned and used in the business to qualify.

Interestingly if a non-qualifying asset is partially used for business purposes that part may still qualify for BPR so there is some flexibility in how assets are used.

Trading Test for Business Property Relief

To qualify for Business Property Relief the business must pass HMRC’s 50% trading test which means more than 50% of the business must be trading activities. This means the business must primarily be selling goods or services rather than investment activities. If investment activities make up a significant part of the business it will fail the trading test and not qualify for BPR.

Businesses should review their activities regularly to make sure such a business meets the trading test on a recognised stock exchange. A move from trading to holding investments can change the business’s BPR status and the inheritance tax strategy for the beneficiaries.

So keeping the business focused on trading activities is key to maintaining the BPR.

Using Business Property Relief to reduce inheritance tax

Business Property Relief is a powerful tool to reduce or eliminate inheritance tax on business assets so family businesses can continue to operate without having to sell vital assets to pay the tax bill. This relief gives 100% inheritance tax exemption on certain business properties so the beneficiaries can inherit the business without a big tax hit. In effect iht business property relief keeps the business intact and operational rather than forcing a sale to pay the tax. Property qualifying for BPR includes certain business properties that meet specific criteria, allowing for significant tax savings.

The best scenario for BPR is when family, friends or business partners will continue to run the business after the owner’s death. To claim BPR you must submit an IHT return with all the business details. A professional valuation is often required to value the business assets and ensure the correct relief is claimed. By meeting these requirements BPR can reduce inheritance tax liabilities by 50% or 100% depending on the asset and usage.

Also a business must have been owned by the deceased for at least 2 years to qualify for BPR. Additionally the business must generate more than 50% of its income from trading activities to be eligible. A business property must be used for the same business to qualify for BPR but this is not a strict requirement.

Lifetime Transfers and BPR

Business Property Relief can also apply to lifetime transfers if certain conditions are met. Typically the ownership period for lifetime gifts to qualify for BPR is 2 years. So if you gift business assets to someone else those assets must have been owned by you for at least 2 years before the gift is made. For gifts to spouses the same 2 year ownership period applies.

Under the 7 year rule the business asset must be owned for 7 years or until death for the relief to be available. If the donor dies within 7 years of making the gift it may be treated as a failed potentially exempt transfer (PET) and could be taxed.

Transfers made more than 7 years before the donor’s death will be outside of inheritance tax. This means they will not be taxed. These rules do not apply to gifts to spouses or civil partners so you can transfer assets tax free between them.

Interaction with Agricultural Property Relief

Business Property Relief and Agricultural Property Relief (APR) are both inheritance tax reliefs but you cannot claim both for the same asset. So an asset can qualify for either BPR or APR but not both. For farming businesses BPR can be used to cover the excess value of agricultural and business property that don’t qualify for APR.

Shares in farming companies may be eligible for BPR instead of APR depending on the leasing status of the land. This flexibility allows farming businesses to plan their tax relief strategically so they can get the most out of the reliefs available to them.

Pitfalls of Business Property Relief

While Business Property Relief is very beneficial there are pitfalls to be aware of. Businesses that mainly deal in securities, land or investments do not qualify for BPR. Assets used for investment purposes do not qualify. So eligibility for BPR can depend on whether a company’s activities are mainly trading or investment related.

Retaining a financial interest in a former partner’s business capital after retirement may disqualify the investment from BPR. Also partial relief under BPR may apply to assets like rented property used in business but owned by others.

Using assets mainly for business purposes for 2 years before transfer will maximise the Business Property Relief. Having binding contracts for sale at the time of transfer may also disqualify BPR.

Discretionary Trusts and BPR

Discretionary trusts are useful for managing and preserving business assets across generations while keeping flexibility and control. Discretionary trusts can protect assets if the spouse or partner doesn’t want to run the business. Since 2006 discretionary trusts have been classed as relevant property trusts which affects their inheritance tax treatment.

Transferring business assets into a discretionary trust incurs no inheritance tax if they qualify for 100% relief. Trustees can maintain the tax advantages by reinvesting the proceeds from sold Business Relief investments back into qualifying assets within 3 years. This means the assets will still qualify for business relief even if the business is sold and the tax benefits will continue.

Spouse and Civil Partner Exemptions

The spouse exemption for inheritance tax is unlimited if both partners are domiciled in the same country. But if a UK domiciled deceased has a non-domiciled spouse the exemption is capped at £325,000. Lifetime gifts to a non-domiciled spouse will use up part of the spouse exemption allowance.

A non-domiciled spouse can elect to be treated as UK domiciled to get the unlimited exemption but this may mean tapering on the second death.

Capital Gains Tax

Transfers of business assets will trigger capital gains tax implications depending on the type of transfer and timing. From April 2026 lifetime transfers of business property will have 100% relief for the first £1 million and 50% relief for amounts above that, which will affect the capital gains tax liability.

So careful planning is needed to manage both inheritance and capital gains tax.

Borrowing to Buy Business Assets

Using borrowed money to buy qualifying business assets will affect the value of the asset for Business Property Relief. The net value of the business asset after deducting the loan will be the basis for BPR calculations. Borrowing to acquire property qualifying for BPR can reduce the net value of the asset for inheritance tax purposes. So the relief applies to the net value not the gross value of the asset.

Also the remaining loan can be set against other taxable assets if repaid upon death so there is some flexibility in managing tax liabilities. This can be useful for buying high value business assets and minimising the inheritance tax liability.

Business Property Relief Planning

Business Property Relief planning involves more than just tax. Business succession planning is often top of the list to ensure smooth operation and control during asset transfer. When gifting business assets you need to keep the business operating and decision making control.

Business owners can apply to HMRC for advance clearance on the availability of Business Relief when planning a chargeable transfer. From April 2026 the full 100% relief for BPR and APR will only apply to the first £1 million of qualifying property so it’s important to stay informed and plan ahead.

Business Property Relief in Practice

Real life examples can illustrate the benefits of Business Property Relief. Take David for example who owns 70% of an unquoted industrial cleaning partnership worth £750,000. This 70% qualifies for 100% business property relief so there is no inheritance tax on that 70%. This is an example of how BPR can remove the inheritance tax on a substantial business interest so the heirs can inherit the business without financial burden.

In another example incorporating a business and retaining ownership of the business premises can give partial relief and reduce the value of the inherited assets. This allows business owners to plan their affairs to maximise the tax benefits of BPR so the business can continue to thrive after they are gone.

Conclusion

In summary Business Property Relief is a key tool to reduce inheritance tax on business assets so family businesses can continue to operate without having to sell key assets. By understanding the qualifying criteria, ownership period and types of assets that qualify business owners can plan their estate to get the most from BPR.

Whether using discretionary trusts, planning for lifetime transfers or the trading test business owners can get significant tax savings. As the rules change it will be important to stay informed and get professional advice to get the most from Business Property Relief. By doing so business owners can protect their legacy and the family business.

Frequently Asked Questions

What is Business Property Relief?

Business Property Relief (BPR) reduces inheritance tax on specific business assets, allowing family-owned businesses and private investors to secure considerable tax savings. This relief is essential for maintaining the viability of such businesses during inheritance transitions.

What types of businesses qualify for BPR?

Only private limited companies, limited liability partnerships, and sole traders transferring their entire business qualify for Business Property Relief (BPR); investment companies and not-for-profit organizations are excluded.

How long must business assets be owned to qualify for BPR?

To qualify for Business Property Relief (BPR), business assets must have been owned for a minimum of two years before the owner’s death.

Can BPR and Agricultural Property Relief be claimed simultaneously?

BPR and Agricultural Property Relief cannot be claimed simultaneously, as assets can qualify for either one, but not both at once.

How does borrowing to acquire business assets affect BPR?

Borrowing to acquire business assets reduces the net value for Business Property Relief (BPR) calculations, as the relief is applied to the net value after subtracting the loan amount. Consequently, this could lower the total relief available.