Posted on: 23-01-2024


Ahead of the next General Election, there are rumours that inheritance tax (IHT) may be cut. It is unlikely to be abolished altogether, so it will still be important to take steps to mitigate your exposure as much as possible. How can business property relief be used in IHT planning?



What is the relief?

Business property relief (BPR) is a relief from inheritance tax (IHT), reducing the value of a qualifying transfer. BPR can apply to a transfer, either made during the transferor’s life or via their will folloing their death, where at least some of the value being transferred is attributable to relevant business property. Relevant business property is defined in s.105 Inheritance Tax Act 1984 (IHTA) as being any of the following:

Note. This last point applies to lifetime transfers only.

The rate at which BPR applies depends on which of these categories the property being transferred falls into:

Type of qualifying propertyApplicable rate of BPR
Business or interest in a business100%
Controlling interest in securities of an unquoted company100%
Any unquoted shares100%
Land, buildings, or machinery used in a company or partnership50%
Settled land, buildings, machinery or plant50%

Note. There is a distinction between the securities and the shares of an unquoted company. It is important to realise that there is a difference between the two.


What is a “business”?

One of the most contentious issues with any BPR claim can be convincing HMRC that a business is actually being carried on. There is no statutory definition of “business” in the legislation, so the plain English meaning is supposed to be used. That may seem straightforward enough but HMRC often has a different view to the taxpayer or their advisor when it comes to classifying a particular activity as a business.

If you need more help take a look at our Business Tax page

Generally, a business will qualify unless the activities it carries out consist wholly or mainly of any of the following:

It is this last point which HMRC often seeks to deny relief on. If it feels that a business activity is too “passive”, i.e. the income is being generated without the owner really needing to do very much, it may try to argue that the business activity is wholly or mainly one of holding investments so that BPR doesn’t apply.

This is a particular problem for businesses with income that derives from land. Any estate with a business that has a more than modest income from letting land in any shape or form will be automatically selected for review if BPR is claimed.

The wholly or mainly condition is taken literally, i.e. it means “more than 50%”. So if a business has some investment activity running alongside a trade, it is not necessarily fatal to a BPR claim as long as the trading activity dominates. This is not just a question of how much income arises from each source but will depend on a number of factors including where capital is employed, where the cost centres are, and where the majority of employees are spending their time and so on.

What do the courts say?

Inevitably where things are not defined in statute clearly, it is necessary to look to decided tribunal cases to build up a picture for the purposes of gauging whether BPR will apply to an activity or not. Over the years it has become apparent that a business will exist, subject to the statutory exceptions mentioned above, if some of the following hallmarks are present:

Note. These tests or indicators were set out in the case of CCE v Lord Fisher [1981] STC 238.

It is imperative that the business is being carried on with the intention to realise a profit.

What does unquoted mean?

A holding of unquoted shares qualifies for BPR at 100%. Obviously, this is very valuable when it comes to IHT planning. But what exactly is meant by unquoted?

Basically, shares will be unquoted for these purposes if they are not listed on a recognised stock exchange. Recognised exchanges tend to be the main market for shares in a particular country. Secondary markets, which have listings of smaller more entrepreneurial companies do not count as recognised stock exchanges for this purpose.

For example, in the UK the main London Stock Exchange and the professional securities market are recognised stock exchanges. however, the alternative investment market and specialist fund market are not. Shares listed on these secondary exchanges are therefore not precluded from BPR.

Care must be taken when using these secondary listings in IHT planning. If the company listed on a secondary exchange were to grow to the point where it was floated on the main market, relief would be lost immediately.

There is no requirement for shares to be registered in the UK to qualify for BPR. As long as they are unquoted they can be anywhere in the world. For example, shares listed on the Sydney futures exchange market of the Australian securities exchange could potentially qualify for BPR, subject to the other conditions being met.

There is also no limit or restriction as to the size of the holding. Unlike a holding of quoted shares, the individual does not need a controlling interest for BPR to apply.

It is important to recognise that this only applies to shareholdings in unquoted companies. If the interest is in the securities of an unquoted company rather than the shares, then the individual will need a controlling interest for any relief to be due.

HMRC provides guidance which is frequently updated in respect of which exchanges around the world are recognised here.

How is relief given?

If the transfer consists of a gift made during the lifetime of the transferor, BPR reduces the value of the transfer for the purpose of working out the tax due on a CLT. Subject to conditions being met, it can also reduce the value of a of a PET which becomes a taxable transfer because the transferor dies within seven years of making it.

If the transfer is a CLT, the relief will also preserve the available NRB. This means that other lifetime gifts can be made, for example to a discretionary trust, and with careful planning no lifetime IHT charge will arise.

Note. There are additional conditions that apply to lifetime transfers for the purposes of BPR – refer to HMRC’s guidance at IHTM 25000 onward for further details.

If the transfer is a PET and the transferor dies within the following seven years the PET becomes chargeable. However, the amount chargeable will be reduced by BPR as long as the shares are still owned by the transferee and they meet the conditions for BPR (apart from the usual requirement that they have been owned for two years).

If the transfer takes place on the death of the owner of the relevant property, the value will be included in the death estate. BPR will then reduce the value where available to either reduce or remove any IHT charge.

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IHT planning with BPR

What is double dipping?

The expression “double dipping” is used to describe many different situations where a tax deduction or relief is used twice over – arguably in circumstances where lawmakers might have intended it to be used only once. For example, a multinational company might seek to deduct an interest expense in two different tax jurisdictions at the same time.

In an example closer to a family’s interests, double dipping may offer a variety of opportunities in estate planning where a sequence of transfers allows a particular relief from IHT to be used more than once. BPR is commonly the subject of such planning. However, opportunities are often overlooked.

Case study – no double dip

Peter died in August 2022 leaving the following estate:

Home (jointly held with spouse)£750,000
Unquoted shares in family trading company£600,000
Quoted shares and cash£800,000

On Peter’s death his joint share in the house passed to Wendy, who was well provided for as sole beneficiary of his self-invested personal pension plan and had personal savings of £250,000 of her own. In his will Peter used his IHT NRB by leaving £325,000 in cash, divided equally between their two children. He left the residue of his estate to Wendy.

For IHT purposes, the cash passing to the children used the whole of Peter’s NRB, while the balance of the estate passing to Wendy was exempt from IHT as a transfer between spouses. Therefore, no IHT was payable on Peter’s death, and the question of BPR on the unquoted shares did not arise.

Available IHT relief was wasted in the sense that the unquoted shares that could have qualified for 100% BPR were instead the subject of an exempt transfer between spouses.

Second death

Wendy dies in April 2024 leaving her whole estate divided equally between the children. Assuming (for simplicity) that the value of her assets had remained unchanged, she would leave the following estate:

Unquoted shares£600,000
Quoted shares and cash£725,000

If all the necessary qualifying conditions were met so that Wendy’s unquoted shares would qualify for 100% BPR, her estate would attract an IHT charge of £460,000 after accounting for her own NRB.

Taking advantage of the dip

To achieve a tax saving by using the double dip, the assets from Peter’s will could be distributed in a different way – either by an amendment to the will during his lifetime, or via a deed of variation post death.

In this case the children, instead of sharing £325,000 from their father’s estate, shared equally in his unquoted shares – qualifying for 100% BPR. The residue of his estate passed to Wendy and, as before, no IHT was payable. His NRB wasn’t used.

In February 2022, a few months after Peter’s death, Wendy bought the unquoted shares from her children at their full value of £600,000, thus providing the children with more cash than they had originally expected to receive from their father’s estate.

On Wendy’s death in April 2024, assuming again that the value of her assets had remained unchanged, she would leave the following estate:

Unquoted shares£600,000
Quoted shares and cash£450,000

Wendy’s estate would benefit not only from her own £325,000 NRB but also from the transferable NRB which had been left unused by her late husband. Assuming that the qualifying conditions were met so that her unquoted shareholding would qualify for 100% BPR, her estate would attract an IHT charge of £220,000 – meaning a saving of £240,000.

This IHT saving equates to the value of the unquoted shares, £600,000, at 40%. It has arisen because the 100% BPR on those shares has been used twice.

There could be concern in some circumstances that leaving the shares to the children outright in this way might not be desirable. They would be temporarily in charge of the company. What would happen if one or more of them decided that they didn’t want to sell the shares back to their mother in favour of a lifetime of dividends from the company profits? Alternatively, what if Peter and Wendy have reservations about one of the children’s spouses. What if they get divorced after Peter’s death and make a claim to the shares?

Note. This situation could be avoided by leaving the shares to a discretionary trust for the benefit of the family, rather than to the children outright.

If the transferor has already died, a deed of variation could be used to change the distribution of the assets in the will.

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If you would like any assistance with any of these points.

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Can BPR be preserved after a sale?

The value of a business assets is protected from IHT by BPR. But as soon as a contract to sell the business is signed, BPR is lost. However, the proceeds can be protected from IHT without waiting two years by purchasing qualifying replacement business property.

There is a time limit of three years in which to find a suitable business in which to invest the money. As soon as a contract to buy into the business is signed, BPR applies, i.e. there’s no two-year wait.

During the period the individual is looking for a new BPR-qualifying investment, the money received from the business assets sold would be liable to IHT. While this can’t be avoided they could take out term life assurance for the three years to cover the IHT bill should the worst happen before they can reinvest.

If the individual hasn’t owned business assets for the required two years to qualify for BPR before selling them, they can still make the short ownership period count by using the replacement rule.


Jane starts a business which is a success from the outset. After just 18 months of trading she is made an offer too good to miss. BPR didn’t apply to the business, but if she invests the proceeds in a qualifying business within the following three years, it will qualify for BPR after just six months. This is because the rules aggregate the 18 months’ ownership of her original business with that of the replacement asset.

After selling a business, even three years might not be enough time to find the right replacement to invest in. So that the individual doesn’t lose the right to immediate BPR for the replacement assets, theycan bridge the gap by investing in one of the many BPR-qualifying portfolios offered by investment companies. They can then sell it once they find a more permanent home for their money. 

Will money lent to a company qualify for BPR?

Loans ymade to a personal company, including credit balances on a director’s loan account, don’t qualify for BPR. HMRC considers them like any other cash investment, e.g. money in a bank account. However, there’s nothing to prevent the owner from swapping the loan for shares in the company which can qualify for BPR. But there’s a right and a wrong way to do this.

Waiting period

Business assets don’t qualify for BPR until they have been owned for at least two years. That’s not long, but no one can be sure what might occur in that time.


Val owns 100% of the shares in Acom Ltd, a company she set up ten years ago. Because it’s a trading company her shares qualify for BPR. Val has put more of her money into Acom over the years to build it up. As at April 2023 Acom (and thus Val’s shares) was worth £1 million. Val also lent Acom money. The debt stood at £100,000 in April 2023. She decided to take more shares in Acom rather than have the money repaid to her. Acom issued new shares to Val to the value of £75,000. Sadly Val died in March 2024. At that time the new shares were worth £125,000. Although they relate to a trading company Val did not own them for two years and so none of the £125,000 qualified for BPR. Her original shares qualified for BPR as they met the two-year condition.

Had Acom issued the new shares in 2023 as a rights issue in respect of Val’s original shares, they would have qualified for BPR immediately, i.e. without the two-year wait.

Enhancing the value

For IHT purposes a rights issue of shares is considered to be an enhancement to the original shares. Therefore, as long as these meet the two-year ownership and other conditions, BPR will be allowed for both tranches of shares. In our example, had Acom and Val followed the advice in our tip, her beneficiaries would have been better off by up to £50,000 (£125,000 x 40% IHT).

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Other tax consequences

Another tax advantage of exchanging a loan for shares in a company is that if the shares become worth less than was paid for them, and the right conditions are met, the shareholder could obtain income tax relief for the loss of value. Before restructuring a company’s share capital we recommend an accountant or tax advisor is consulted.

Are there problems with using borrowings to fund investments?

If an individual takes out a loan, the money they owe is a liability of their estate and so reduces the value on which IHT is payable. If they use the money to lend to their company, this will hopefully promote growth and boost the value of its shares. But where BPR applies there’s no corresponding increase in the estate’s IHT bill. It seems the perfect tax-saving plan. Create a debt which reduces the value of the estate, and use it to enhance the value of an asset (the company shares) on which no IHT is payable. The trouble is HMRC spotted this and closed the loophole in 2013

Since the 2013 change, when working out IHT, money borrowed and used to fund a business reduces its value first and thus the amount of the estate which qualifies for BPR.


Tim owns 100% of the shares in Acom Ltd. The shares qualify for BPR and are worth £700,000. He started Acom with £150,000 raised by mortgaging his home. The rest of Tim’s estate is worth £900,000. If Tim died or gave away his shares to, say, his children, the mortgage will reduce the value of his shares in Acom to £550,000 for IHT purposes, so the BPR that can be claimed is equal to that and not the actual value of the shares (£700,000). The mortgage doesn’t reduce the £900,000, which is therefore liable to IHT, after allowing for the NRB.

Can the owner use their own assets in a business to shelter them from IHT?

For qualifying company shares BPR reduces the value of an asset chargeable to IHT by 100%, subject of course to the usual conditions. But there’s also a 50% rate of BPR which applies to personally owned assets which are used in the company’s business. This half-rate relief is usually claimed for land or buildings.


Robert is the majority director shareholder in Acom Ltd, an engineering firm. He owns the freehold to the building from which Acom trades. Robert dies in April 2024 and the value of the freehold at the time is £100,000. BPR reduces the amount chargeable to IHT by 50% to £50,000. This saves his estate £20,000 in IHT (£50,000 x 40%).

If you need more help take a look at our Personal Tax page

Personal assets

In our example the arrangement for the business premises should easily be picked up by the executor when filling out the IHT forms. However, they might not give Robert’s £40,000 car a second thought before recording it as a personal asset and handing over IHT to HMRC.

If Robert “wholly or mainly” used the car for work, it will qualify for 50% BPR, which would mean HMRC receives £16,000 less and his beneficiaries that much more.


Personally owned assets qualify for 50% BPR if:


While the executors don’t need to provide evidence with the IHT forms that a car or any other machinery etc., was used in the business, HMRC may later ask for proof. For assets such as a building that will usually be simple, but for machinery and plant it could be more difficult to produce.

Business mileage claims shown on personal tax returns or held by the company, along with service or MOT records showing total mileage, is good evidence of business use.

What if the owner is concerned about giving business assets to their children?

Many people have concerns about the BPR rules changing in the future because the relief is so generous. For example, one concern is that the “wholly or mainly” test might be tightened so that non-trading activities must be no more than incidental.

Another concern business owners may have is that their business’s trading status could change before they die, meaning that BPR wouldn’t be due.


Felix has owned a small garment making company for many years. However, trading has experienced a downturn, partly due to economic conditions and partly due to Felix’s age. By the time of Felix’s death, the company is effectively just a healthy bank balance and a fixed asset register, with plant and machinery that hasn’t been used much in years. BPR could be denied on the transfer of the shares.

Where there are concerns along these lines there is a strategy that can be used. Let’s say an owner is worried about the rules being changed as their company has some investment activity running alongside its trade.

To allay concerns the owner has decided to give their three adult children shares in the company now. Not only will the value of the estate reduce, but it will not be inflated by the dividends the shares produce in future, thus potentially saving more IHT. 

An outright gift

One option would be to simply give the children shares with no strings attached, i.e. make an outright gift. The trouble is this might cause problems with management of the business because each child will have a right to vote on company decisions. In the event of a family dispute this could prove tricky.

The owner could limit voting and other rights on the shares to avoid potential trouble with managing the company. However, this could result in the loss of BPR on the shares.

Instead of making an outright gift the owner could transfer the shares into a trust of which the children are the beneficiaries and entitled to the income (dividends) as they arise. The owner can appoint themself as one of the trustees which means that effectively they will keep hold of the voting powers that go with the shares.

Tax consequences – IHT

Gifts to a trust during lifetime that exceed the IHT NRB (currently £325,000) trigger a tax bill. However, where BPR applies there won’t be a charge no matter how much the shares are worth.

Generally, the sooner a gift is made the better for IHT purposes because the younger the donor is, the greater their life expectancy. As long as they survive for seven years the gift into the trust will fall entirely outside the scope of IHT. 

Tax consequences – CGT

Where a shareholder makes an outright gift of shares or transfer them to a trust, HMRC treats the transaction as if they sold them. If, at the time of the gift, the shares are worth more than they cost, the difference counts as a taxable capital gain. It is possible to elect for CGT not to apply to the gift into the trust by using holdover relief.

Will a retiring partner lose BPR?

A partner’s interest in a trading partnership can qualify for BPR, subject to the conditional requirements of the relief being met. One potential trap that should be looked at is whether the partnership agreement provides that the personal representatives are obliged to sell their share to the remaining partners. If it does, no BPR is available as HMRC takes the view that this is a binding contract for sale. One of the conditions for BPR is that no such binding contract exists.

If there is selling clause like this, is can be replaced with a cross option agreement instead. This achieves the same thing without losing the BPR entitlement.


If a partner retires from the partnership, BPR is lost immediately as they no longer have an interest in the business. Even if they do not withdraw the capital this is simply treated as a loan, i.e. an asset for IHT purposes.

Assuming that the remaining partners buy the outgoing partner’s share, there will potentially be CGT to pay. Whatever is left over will simply be cash for IHT purposes, unless it is reinvested into assets qualifying for BPR, or another IHT relief.

One way to avoid losing the entitlement would be to remain in the partnership but withdraw from the decision-making process and only take a very small profit share, i.e. retirement in all but name.

A partner wishing to adopt this strategy should ensure that only the profit-sharing ratio is changed, and not change the capital shares. Not only could this trigger a chargeable disposal (if there is an asset revaluation), but theywill diminish the value of their share in the business, meaning the amount of BPR will decrease.

The downside to this approach is that they will remain jointly and severally liable for the debts of the partnership.

What about sole traders?

When a sole trader retires, the business simply ceases to exist, so BPR can’t apply, meaning an IHT liability can literally pop up overnight. One way around this would be to bring in a partner (ideally a descendant who will carry on the business), then reduce the profit share in the way described above.

Another solution would be to incorporate, as the BPR would then apply to the shares and there would be no need to actively participate in running the business. This would work very well if, say, the trader appointed an adult child as the director to run the company, but retained 100% of the shares. The shares could then pass via the will with BPR applying to remove the IHT.

How can protection from IHT be acquired quickly?

One of the best-known strategies for reducing the taxable estate is to make investments into BPR qualifying portfolios through a financial advisor. This would typically take the form of an AIM listed portfolio of shares. The idea is that BPR will apply after two years, and so it is often used as an alternative or enhancement to making lifetime gifts, which remain taxable for seven years.

An individual can increase the tax-saving power of this strategy by making at least some of the investments into companies which qualify under the enterprise investment scheme (EIS). Qualifying investments made under the EIS attract an income tax reduction of up to 30% of the amount invested. This makes the BPR investment cheaper. They could even consider taking out an insurance premium to cover the two-year qualifying period so that if they do die without the BPR entitlement, the additional IHT bill is covered.

Example 1

Claire, an additional rate taxpayer, meets with her financial advisor and is interested in making an investment qualifying for BPR. She wants to invest £1 million to shelter from IHT. The financial advisor’s fee will be 5%, i.e. £50,000 of the amount invested. This will be immediately outside of Claire’s estate as the money has been spent. The remaining £950,000 will remain chargeable for two years. She speaks to her tax advisor before agreeing, and following a joint meeting, the strategy changes so that £500,000 will be invested into assets qualifying under EIS. This reduces Claire’s income tax by £200,000. This reduces the cash cost of her investment to £800,000, as it leaves her with £200,000 in cash, and £950,000 in unquoted shares.

One problem with this is that it increases Claire’s estate, and therefore the exposure to IHT. The £950,000 unquoted shares remain vulnerable to IHT for two years.  One way to protect against this would be to take out life insurance to cover the amount of IHT at stake for those two years. This would probably be for an upfront lump sum premium. This effectively gives protection from day one, because even if Claire were to die the following week, the IHT wouldn’t be paid from the estate assets. Using the income tax reduction from the EIS investment means that this can be done with no real cost to the individual.

Example 2

The tax at stake from the shares is £380,000. Given Claire’s health and relatively young age, an insurance company is happy to assure this amount for a one-off premium of £120,000. Claire now has the peace of mind that if anything were to happen to her before the BPR minimum holding period were met, the IHT at stake would be covered. The premium has been paid out of a tax reduction and so has not depleted her savings or income, and she is still £80,000 in pocket.

Obviously, the numbers used here are intended for illustrative purposes only. Any individual would need to take independent financial advice that would take their own circumstances into account if they wanted to explore and/or implement this planning.

If you would like any assistance with any of these points.

Please Call Us on 0161 872 8671

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