Business Property Relief (BPR), also known as 'business relief', is a valuable Inheritance Tax (IHT) relief in the UK. It allows the value of certain business assets to be reduced for IHT purposes by either 50% or 100%. This reduction can apply to both lifetime gifts and transfers on death, potentially leading to a considerable reduction in the Inheritance Tax payable on a person's estate.
How Does Business Property Relief Work?
When a person dies, their estate (assets, including property, money, and possessions) may be subject to Inheritance Tax. IHT is typically charged at 40% on the value of the estate above a certain threshold (the 'nil-rate band'). BPR provides a mechanism to reduce the taxable value of qualifying business assets, thereby lowering the overall IHT liability.
The relief is not automatic; specific conditions must be met for it to apply. Its primary goal is to prevent trading businesses from being broken up or sold to pay IHT, encouraging the continuity of businesses and entrepreneurship.
What Qualifies as 'Relevant Business Property'?
The definition of 'relevant business property' is central to BPR. It generally refers to assets that are part of a trading business, distinguishing them from purely investment assets. The percentage of relief depends on the type of business property.
Assets Qualifying for 100% Relief
These assets typically involve a direct interest in a trading business:
- A business or an interest in a business: This includes sole proprietorships and partnerships.
- Shares in an unquoted company: This covers shares in private limited companies and those traded on specific markets like the Alternative Investment Market (AIM), which are considered unquoted for BPR purposes.
Assets Qualifying for 50% Relief
These assets are generally related to a business but might not represent a direct ownership stake in the entire business itself:
- Shares controlling a quoted company: If an individual owns enough shares to control a company listed on a stock exchange (i.e., more than 50% of the voting rights).
- Land, buildings, machinery, or plant used wholly or mainly for the purposes of a business: This applies if the assets are used by a partnership of which the deceased was a member, or by a company which the deceased controlled.
- Land, buildings, or machinery or plant available to a trading company controlled by the individual, or a partnership where the individual was a partner: This applies even if the assets are not owned by the company or partnership itself, but by the individual.
Key Conditions for BPR
To claim BPR, specific criteria must be satisfied at the time of the transfer (either gift or death).
1. Ownership Period
The business property must have been owned by the deceased or donor for at least two years immediately prior to the transfer (gift or death). This prevents individuals from acquiring business assets solely to gain IHT relief shortly before a transfer.
2. Business Type
The business must be a trading business, not one that deals wholly or mainly in investments. Examples of investment businesses that typically do not qualify include:
- Property letting businesses (unless significant services are provided alongside the property).
- Share dealing companies.
- Businesses holding substantial cash reserves that are not required for trading purposes.
3. Assets Used in Business
The assets must be used in the qualifying business. Assets not actively used in the business, or those held purely for personal use, would generally not qualify.
Examples of BPR in Action
Let's look at how BPR can make a tangible difference:
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Scenario 1: Family Trading Company
- John owns 100% of the shares in his family's manufacturing company, an unquoted trading business, for 15 years.
- On his death, the shares are valued at £1,000,000.
- Because it's shares in an unquoted trading company, 100% BPR applies.
- The taxable value for IHT purposes is reduced to £0, saving his estate £400,000 in IHT (40% of £1,000,000).
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Scenario 2: Commercial Property Let to a Business
- Sarah owns a commercial building valued at £500,000, which she leases to a trading company that she controls. She has owned it for 10 years.
- On her death, the building qualifies for 50% BPR.
- The taxable value for IHT purposes is reduced by 50% (£250,000).
- This saves her estate £100,000 in IHT (40% of £250,000).
Who Can Benefit from BPR?
BPR is highly beneficial for:
- Business owners: Sole traders, partners in a partnership.
- Shareholders in private limited companies: Especially those with unquoted shares.
- Individuals with significant assets used by a trading business they control.
Exclusions and Limitations
While powerful, BPR has specific exclusions:
- Businesses that are 'wholly or mainly investment': As mentioned, property letting, share dealing, or land management businesses generally don't qualify. HMRC scrutinizes the balance between trading and investment activities.
- Assets subject to a binding contract for sale: If there's an agreement to sell the property at the time of transfer, BPR may not apply.
- Excepted assets: Assets within a business that are not used wholly or mainly for business purposes during the two years leading up to the transfer (e.g., excess cash not needed for trading).
- Quoted shares (unless controlling interest): Simple ownership of shares in a public company (without control) does not qualify.
Practical Considerations
Effective IHT planning often involves considering BPR. It's crucial for business owners to:
- Review their business structure: Ensure it aligns with BPR requirements.
- Maintain accurate records: Document ownership periods and business activities.
- Regularly assess asset usage: Confirm assets continue to be used in the business.
- Seek professional advice: Inheritance tax rules are complex, and specialist advice from a tax advisor or solicitor can ensure eligibility and maximize the relief.
Summary Table: BPR Relief Rates
| Type of Property | BPR Relief Rate |
|---|---|
| Business or interest in a business (sole trader, partnership) | 100% |
| Shares in an unquoted company (e.g., private limited, AIM) | 100% |
| Shares controlling a quoted company | 50% |
| Land, buildings, machinery, or plant used by a business controlled by the deceased/donor or a partnership they were part of | 50% |
