Business Property Relief

Qualifying Business Assets

BPR applies to different types of business property at different rates. 100% relief applies to: a sole trader business (or interest in a partnership), shares in an unlisted company (including shares traded on AIM or the Alternative Investment Market), and securities in an unlisted company that give control of the company (unquoted securities giving control). 50% relief applies to: shares or securities in a listed company that give control (a controlling shareholding in a quoted company), land, buildings, or machinery owned by the deceased and used wholly or mainly in a business carried on by a partnership of which they were a member or a company of which they had control, and certain business assets used by the business. The asset must have been owned for at least two years before the transfer. For sole traders and partnerships, the business as a whole must be a qualifying business — meaning it is carried on for gain and is not mainly an investment business or one dealing in shares, land, or financial instruments. For company shares, the company must be a qualifying trading company — the same test applies. Companies whose business consists wholly or mainly of holding investments, dealing in land, dealing in shares or securities, or making financial investments are excluded. This includes most property investment companies, investment trusts, and holding companies for investment portfolios.

Finance Act 2026 Changes

The Finance Act 2026 made the most significant changes to BPR since the relief was introduced in 1976. From 6 April 2026, the 100% relief previously available on all qualifying business assets is replaced with a £1 million cap. The first £1 million of qualifying business value per person receives 100% relief. Any qualifying business value above £1 million receives 50% relief (so the effective IHT rate on the excess is 20%). The £1 million cap applies per person, not per business. If you own multiple qualifying businesses, the cap applies to the combined value of all of them. For a married couple or civil partners, each person has their own £1 million cap, potentially shielding up to £2 million of business assets. The cap applies before any other reliefs or the nil-rate band. For example, a business owner with a qualifying business worth £2.5 million would have: first £1 million — 100% relief (no IHT), next £1.5 million — 50% relief (taxed at 20% on the remaining value, so £300,000 IHT on that portion). After the business value is reduced by BPR, the remaining assets use the nil-rate band and other reliefs. The change is designed to raise revenue from larger businesses while protecting the vast majority of smaller family businesses. The government estimates that only 4% of business owners will be affected by the cap. However, for those affected, the additional IHT can be substantial. Business owners with estates approaching or exceeding £1 million in business assets should review their estate plans and consider strategies such as lifetime gifts (survive seven years and the BPR cap is irrelevant) or spreading ownership across family members.

Replacement Property Rules

The replacement property rules are important for business owners who change their business structure or sell a business and buy another. If you owned qualifying business property for at least two years and replaced it with another qualifying business property within three years, the period of ownership of the old property counts towards the two-year test for the new property. This is particularly useful when a sole trader incorporates their business or when a business owner sells one company and buys another. The replacement property rules apply to business assets, shares in companies, and partnership interests. If you sell a qualifying business and reinvest the proceeds in another qualifying business, the combined ownership period can satisfy the two-year test. If the replacement occurs more than three years after the disposal, the old ownership period is lost and a new two-year period starts from the date of acquisition. There are also rules for successive transfers: if you inherit qualifying business property from someone who owned it for at least two years, you are deemed to have satisfied the ownership test immediately. This means you can sell or gift the inherited business property without having to wait two years. Similarly, if you inherit business property from a spouse or civil partner, their ownership period is added to yours.

Excluded Companies and Activities

BPR is not available for businesses whose main activity is wholly or mainly one of the following: dealing in land, buildings, or commodities; dealing in shares, securities, or other financial instruments; making or holding investments; or carrying on a profession or vocation (such as accountancy, law, or consultancy) that is not a qualifying business. The "wholly or mainly" test is applied by looking at the company's activities, assets, income, and time spent by management. A company with significant investment assets (such as a large cash balance or investment property portfolio) may fail the test even if it carries on a small trading activity. The key is that the business must be a trading business. HMRC's guidance provides examples: a company that operates pubs (trading) qualifies; a company that owns pubs and rents them out (investment) does not. A mixed business — one that has both trading and investment activities — may still qualify if the investment activities are not the main activity. The test is applied on a case-by-case basis, and HMRC publishes detailed guidance in their Inheritance Tax Manual. If a company is excluded from BPR, its shares are treated as investment assets and are subject to full IHT at 40% in the estate. This is a particular issue for businesses that have accumulated significant cash or property investments over time. Regular reviews of the company's asset mix can help maintain BPR eligibility.

Claiming BPR

BPR is claimed on the IHT400 account, which must be submitted by the personal representatives of the deceased. The claim must include details of the business, the type of property, the period of ownership, and the value of the relief claimed. Supporting evidence includes the company's accounts, share certificates, partnership agreements, and a valuation of the business assets. A shareholder/director's confirmation that the company is a qualifying trading company should be obtained. HMRC may open an enquiry into the BPR claim, particularly for businesses with mixed activities or significant investment assets. The burden of proof is on the personal representatives to show that the business qualifies for BPR. If HMRC rejects the claim, the estate will owe IHT on the business assets, potentially forcing a sale of the business to pay the tax. This makes it essential to have professional advice when preparing the claim and to keep up-to-date records of the business's trading status. For lifetime transfers of business assets, BPR can be claimed at the time of the transfer — if available, the lifetime transfer is exempt from IHT even if it exceeds the nil-rate band. The donee takes the asset with the donor's period of ownership for the purpose of any future BPR claims. However, the Finance Act 2026 cap applies to lifetime transfers as well as death estates, so lifetime gifts of business assets above £1 million may still trigger an IHT charge.

FAQs

Do AIM shares qualify for BPR?

Yes. Shares traded on AIM (the Alternative Investment Market) are treated as unlisted shares for BPR purposes and qualify for 100% relief (subject to the £1 million cap from April 2026). This makes AIM a popular market for investors seeking IHT-efficient growth. However, AIM shares are higher risk than main market listed shares, and the company must still be a qualifying trading company.

Can I claim BPR on a property investment company?

No. A company whose main activity is holding investments (including property investments) is excluded from BPR. If the company carries on a genuine trading business such as property development or construction, it may qualify. The distinction between trading and investment is critical and is often the subject of HMRC enquiries.

What is the effect of the Finance Act 2026 cap on BPR?

From 6 April 2026, the first £1 million of qualifying business value per person receives 100% relief, with any excess receiving 50% relief. This means a business worth £3 million would have £1 million fully relieved and £2 million relieved at 50%, giving an effective IHT rate of 20% on the excess after relief.