The Autumn Budget 2024 introduced pivotal changes to Business Property Relief (BPR), reshaping how business owners could mitigate their Inheritance Tax (IHT) liability. Effective April 2026, these reforms include a £1 million cap on 100% relief for qualifying assets, with assets exceeding this threshold only eligible for 50% relief. For many family-run businesses and SMEs, this represents a fundamental shift in succession planning and wealth preservation.
Business Property Relief, also known as Business Relief, has long been a cornerstone of estate planning, allowing eligible business owners to reduce the IHT burden on their estates. Understanding BPR and these pending changes is crucial for business owners who wish to plan their estates efficiently and ensure their businesses continue generationally without the burden of substantial IHT liabilities.
In this article, we will explain how Business Property Relief works, what types of assets qualify for BPR, the types of businesses that can benefit from this relief, and the changes to BPR announced in the Autumn Budget 2024.
We will also explore the steps required to claim BPR, considerations business owners should keep in mind, and how we can help you reduce your inheritance tax liability.
Table of Contents
What is Business Property Relief (BPR)?
Business Property Relief (BPR) is a specialised tax relief designed to reduce, or in some cases eliminate, inheritance tax liabilities by reducing the value of a business’s assets for IHT calculations.
This tax relief helps business owners pass on their businesses to future generations without being forced to sell off assets to meet an IHT liability. The main goal of BPR is to prevent family businesses from being unduly burdened by IHT and to ensure they remain intact for future generations.
Initially introduced in the 1976 Finance Act, BPR has remained a crucial part of the UK’s tax system and has been relied upon by numerous small business owners to continue family businesses. Most notably, businesses that garner a higher asset book value but have a relatively small return on asset (ROA) value, such as farms and manufacturing operations.
The relief can either reduce the value of business assets by 100% or 50%, depending on the type of asset. This reduction in value directly reduces the amount of IHT payable without using any nil rate band allowances.
Trusts can also help protect assets and manage Inheritance Tax liabilities effectively. To understand how Trusts can help mitigate IHT, read our detailed article, “Can a Trust Help Reduce Inheritance Tax?”.
How does Business Property Relief Work?
Business Property Relief reduces the value of business assets when calculating IHT. This reduction can be 100% or 50%, depending on the specific type of asset involved.
What is the Rate of Business Property Relief?
The rate at which business relief applies depends on the type of asset and how it is used within the business. There are two main rates:
- 100% Business Relief: This applies to business assets that are integral to the operation of the business. This includes shares in unlisted companies, interests in partnerships, and assets directly used in the business, such as land, buildings, machinery, and equipment.
- 50% Business Relief: This applies to certain assets used in the business but not directly owned by the deceased. This includes rented property or machinery used in the business but owned by someone else, such as an external landlord.
The Autumn Budget 2024 introduced a £1m cap on 100% business relief, with any values exceeding this amount only benefiting from 50% relief from April 2026. You can read more about these changes in our article covering the Autumn Budget 2024.
What is the Two-Year Rule for Business Property Relief?
One of the essential eligibility criteria for Business Property Relief is the Two-Year Ownership Rule. To qualify for BPR, the deceased must have owned the business or asset for at least two years before death. This rule ensures that BPR is available only for business assets that have been part of a long-term estate plan and are not used as a quick measure to reduce IHT liabilities.
This two-year requirement is important because it prevents individuals from transferring business assets into their estate shortly before their death to avoid IHT. It helps ensure that BPR is applied to genuine business assets and that the relief is not used for tax avoidance.
Which Types of Businesses Qualify for Business Property Relief?
For a business to qualify for Business Property Relief, it must be a trading business. This means that the business must be involved in active trading as opposed to merely holding investments.
HMRC typically considers a “trading business” to generate over 50% of its income from active trading activities, such as selling goods or services. Businesses that generate income from passive activities, such as letting property or holding stocks, typically do not qualify for BPR.
Qualifying businesses generally include:
- Manufacturing, Retail, and Service-based businesses: These include factories, shops, online stores, and law firms.
- Agricultural businesses: Farms and agricultural operations that produce food, crops, or livestock. Assets that also qualify for agricultural relief do not qualify for BPR.
Qualifying businesses can be in three structures:
- Shares in Unquoted Qualifying Companies: A company not listed on the stock market and meets trading requirements for BPR.
- Qualifying Companies listed on the AIM: A company listed on the London Stock Exchange but under the Alternative Investment Market (AIM) and meets BPR requirements.
- Unincorporated trading business: A sole trader or partnership.
Can a Sole Trader Qualify for Business Property Relief?
A Sole Trader can qualify for Business Property Relief, provided their business is actively trading. The eligibility criteria for sole traders are the same as for other business structures: the company must be trading, and the owner must meet the two-year ownership requirement.
Despite the introduction of a £1m cap on 100% relief, it is likely that a sole trader would still be able to benefit from the full tax relief advantages, assuming their business qualifies under these rules.
What Assets Qualify for Business Property Relief?
The following assets typically qualify for 100% Business Relief:
- Shares in unlisted companies: Shares in private companies or companies not listed on the stock exchange involved in active trading.
The following assets typically qualify for 50% Business Relief:
- Business property: Assets such as land, buildings, and machinery owned by the deceased and used in a business they were a partner in or controlled
- Business Trust: Land, buildings, or machinery used in the business and held in a trust from which it has the right to benefit.
- Partnership interests: If you hold a partnership interest in an active business.
The business’s assets must be actively involved in day-to-day operations to benefit from BPR.
What Does Not Qualify for Business Property Relief?
Certain assets are excluded from Business Property Relief (BPR) because they are not considered integral to the active running of a business.
These exclusions help ensure the relief targets business-focused assets rather than passive or personal holdings. The main exclusions include:
- Investment Assets: Assets held primarily for investment purposes are not eligible for BPR. This category includes:
- Shares in publicly traded companies.
- Rental properties not actively used in the business.
- Other investments intended to generate passive income or capital growth.
- Non-Business Assets: Assets unrelated to business operations, such as the family home or personal possessions, do not qualify. Even within a business, assets used for personal benefit or unrelated activities are excluded.
- Excepted Assets: Business-owned assets that have not been used wholly or mainly for business purposes in the two years preceding a transfer or that are not required for future business use are also excluded. For example, a property owned by the business but not actively used for its operations falls under this category.
- Liquidated or Dormant Businesses: Relief is not available for businesses that have ceased trading or are no longer operational at the time of transfer.
- Business Sale: If the business is being sold, relief cannot be claimed unless the sale is to a company that will carry on the business, and the estate will be paid mainly in company shares.
- Agricultural Relief: Assets that qualify for agricultural relief do not qualify for BPR.
Considerations When Using Business Property Relief
While Business Property Relief provides significant tax relief, there are some important considerations that business owners should keep in mind:
- Accurate asset valuation: It is essential to have an accurate valuation of the business and its assets, as incorrect valuations can lead to reduced relief or an unsuccessful claim.
- Changing regulations: The rules around BPR are subject to change, as seen with the announcement of updates in the Autumn Budget 2024. Business owners should stay informed about these changes to ensure they continue to benefit from BPR.
- Partial relief: Some assets, such as rented property or machinery, may only qualify for partial relief. Business owners should understand how partial relief works and how it may affect their IHT liability.
- Ownership Structures: Joint ownership can complicate eligibility for relief.
- Trading Status: Businesses engaged in both trading and investment activities may face scrutiny to prove over 50% of their operations are trading-focused.
How do I Claim Business Property Relief?
Claiming Business Property Relief involves several steps:
- Valuation: A professional valuation is typically required to determine the value of the business assets.
- Verification of eligibility: The business must meet all the BPR criteria, including the two-year ownership requirement and active trading status.
- Completing Form IHT400: Provide detailed information on the business and its activities.
- Submitting Evidence: Include supporting documents, such as balance sheets, trading records, and shareholder agreements.
- IHT return: The claim for BPR is made as part of the IHT return filed with HMRC. The IHT return must include all relevant details about the business assets, their value, and how they meet the BPR criteria.
If you need assistance with any aspect of claiming Business Property Relief, including asset valuation, eligibility checks, or understanding the criteria, our team are here to support you, so get in touch today.
Conclusion
Business Property Relief is a valuable tool for business owners seeking to reduce their IHT liabilities and ensure their business continues to thrive after they pass away.
With recent updates announced in the Autumn Budget 2024, understanding how BPR works and the types of assets that qualify has become even more important.
By working with tax professionals and planning ahead, business owners can make the most of BPR to secure the future of their businesses and reduce the tax burden on their children.
We specialise in helping clients navigate the complexities of tax planning, including optimising their use of BPR. Whether you’re looking to transfer your business to the next generation or simply explore how BPR can fit into your long-term estate strategy, our experienced team is here to help.
Get in touch with us today to discuss how we can assist in securing your business’s future while minimising Inheritance Tax liabilities. From understanding your eligibility to filing accurate claims with HMRC, we’ll provide guidance every step of the way.