Under the UK inheritance tax rules, estates which are over a certain value are subject to inheritance tax at a rate of 40%. Business Property Relief (BPR) is a UK tax relief that reduces or exempts the inheritance tax (IHT) liability on certain types of business assets when they are passed on as part of an inheritance or gift. It is designed to help protect family-owned businesses and encourage entrepreneurship.
If you own a business or an interest in business assets for at least 2 years before your death, you are able to claim this tax relief which can reduce the value of a business or business assets used in the calculation of IHT liability. Inheritance tax is tax paid on your estate when you pass away. The current UK threshold for everybody in the UK is £325,000 which is known as the Nil Rate Band. Anything over this amount is what your estate will pay inheritance tax on.
If you inherit the asset from your spouse who owned it for less than two years, then you can add your period of ownership and if the combined ownership is more than two years, you will be eligible for BPR relief.
To qualify for Business Property Relief, the asset must be considered “relevant business property.” This typically includes:
- A business or interest in a business, such as a sole proprietorship, partnership, or shares in an unquoted trading company.
- Land, buildings, or machinery used wholly or mainly for business purposes in a qualifying partnership or trading company.
- Shares or securities that control more than 50% of the voting rights in a qualifying trading company.
The relief is available at two rates:
100% relief: This applies to assets such as a business or interest in a business, including unquoted shares in trading companies. If these assets meet the criteria, their full market value is exempt from inheritance tax. For instance, you need to have a qualifying trading business or an interest in one which entitles you to 100% relief or shares in an unlisted qualifying company which entitles you to 100% relief.
50% relief: This applies to other types of relevant business property, such as land, buildings, or machinery used for business purposes. In these cases, only 50% of the market value of the asset is subject to inheritance tax. For example, shares in a qualifying company listed on the Alternative Investment Market (AIM) of the London Stock Exchange which allows you 50% relief.
It’s important to note that Business Property Relief is subject to certain conditions and exceptions. For example, relief is generally not available for assets held mainly for investment purposes, assets used in excluded activities like holding securities or land, or assets held for future development.
It’s always advisable to consult with a tax professional or financial advisor to understand the criteria and implications of Business Property Relief based on your individual circumstances.
The executor of the will or administrator of the estate will need to fill out two forms: Form IHT 400 (Inheritance Tax Account) and Schedule IHT413 (Business or partnership interests and assets) in order to claim this relief.
It is important to note that HMRC assesses entitlement to the relief upon the estate’s claim after you have died. This means your qualifying business assets will need to maintain their BPR-qualifying status at that time.
If you would like more advice on understanding whether your business qualifies for business property relief, please speak to a member of our Private Client department.