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Business and partnership assets are generally favoured for tax purposes to encourage entrepreneurship and continuity in the business community. The key to favourable treatment is having a “qualifying business asset” at the relevant date. It is all too easy to lose qualifying status if you do not understand the rules.

While most business owners focus on Entrepreneurs Relief, available at 10% since 23 June 2010 on the first £5m of capital gains realised on sale or retirement, there are also important Inheritance Tax (IHT) reliefs for people passing on the family business or partnership assets. These may include farms and estates, but the application of IHT reliefs to agricultural property is not covered by these notes. Subject to reliefs, IHT otherwise applies on lifetime transfers of assets at 20% and on death at 40%.

Most people are familiar with the IHT exemption for transfers of assets between spouses (unless one is of non-UK domicile) and the “Nil Rate Band” frozen at £325,000 for 2010-15. Above the NRB threshold gifts to children and other family members, whether personally or via a Trust, result in IHT being payable.

Less familiar are the rules for Business Property Relief (BPR).

Business Property Relief

BPR is available at 50% or 100% depending upon the type of asset and is available both in your lifetime and upon your death.

The following assets attract 100% relief from IHT:

  • property consisting of a “business or interest in a business” run by a sole trader, partnership or company;
  • unquoted company shares, i.e. shares not quoted on a recognised stock exchange; and
  • securities of an unquoted company which either by themselves or together with other securities owned by you give you control of the company.

The following assets attract 50% relief from IHT:

  • Land, buildings, plant and machinery used wholly or mainly for the purpose of a business carried on by a company you control or a partnership of which you are a member;
  • Land, buildings, plant and machinery which is settled property in which you have an interest in possession, and is used wholly or mainly for your business purposes; and
  • quoted shares that confer control on you

There are further conditions relating to the business before the relief is available:

  • Must be carried on for gain.  It is not enough simply to allow your business to make losses for tax reasons and then claim your interest within the business qualifies for BPR.
  • Must NOT consist “wholly or mainly” of dealing in securities, stocks or shares; dealing in land or buildings, or making or holding investments. If your business does consist wholly or mainly of any of the above exceptions then BPR will not be available regardless of any other circumstances.
  • Assets must be owned for at least 2 years before the date of transfer (during your lifetime or on death).  There is an exception for securities inherited on the death of a spouse/civil partner, as the recipient also “inherits” the deceased’s period of ownership.​
Pitfalls on transfers (lifetime/death)

There are several situations that can lead to the loss of BPR:

  • Holding large sums of cash in excess of normal operational and business development requirements can result in the business purpose being deemed to be “wholly or mainly” holding cash as an investment, and not a trade/business.
  • If you die within 7 years of making the gift the BPR initially available will be lost if the asset transferred no longer qualifies for BPR. The conditions of BPR must be met at the date of the transfer by you, and for the next 7 years by your successors. There are exceptions where qualifying property is replaced within a certain time limit.
  • If you make a gift of business assets and these assets are sold within 7 years of the date of making the gift, the assets may no longer qualify for BPR which could result in “claw back” of the BPR previously applicable, leading to an IHT charge.
  • A transfer of an asset of a business may not qualify for BPR if merely an asset, and not a part of, or interest in, the business. See if the value of the business itself has reduced.
  • Shares that are registered on the UK Alternative Investment Market (AIM) qualify for 100% BPR, but if the shares become registered on another stock exchange anywhere in the world, BPR is lost from the date of re-registration or dual registration. The simplest example is moving from an AIM listing to a full London Stockmarket listing.
  • Business assets that are subject to a binding contract of sale do not qualify for BPR.  In other words, if you are contemplating a sale of an interest in your business, do review any IHT planning opportunities for the family before signing any contract for sale.
  • This is important for partnerships and shareholders wishing to offer security on the death of their partner/shareholder. Instead of a binding contract of sale the partners/ shareholders should have an agreement to allow each party the “option” or “opportunity” to purchase the outgoing shares/interests of the leaving/dead shareholder or partner.
  • Interests in property companies, owning or developing properties with a view to receiving rental income, are not business assets or interests for the purpose of BPR.  In effect, HMRC have ruled that the “passive receipt of rent” from properties is an investment and therefore no BPR is available. HMRC also have a particular hang-up about farmers running caravan sites – unless a wide range of services are supplied.
  • By contrast, developing land for housing or commercial/industrial units for onward sale is a trading activity qualifying for BPR. In between is a “grey area” where land may be acquired as part of a “land bank” in the hope of obtaining planning consent – is this part of the trade? or an investment which could cause the business to fail the “wholly or mainly” test? This is a matter of fact and judgement.

If you have a business asset that qualified for BPR at the date of the transfer but later ceases to qualify, for example if the business is sold, the amount of IHT that then becomes due could be paid by ten equal interest-free annual instalments. This interest-free option applies to transfers on death and lifetime transfers where the recipient of the gift bears the burden of the tax that applies after the loss of the BPR.

The rules applying to the disposal of business assets by Will, when no lifetime IHT planning has been tackled, are complex. But there is an opportunity to maximize the value of property passing tax free to children at that stage as long as your Will is drafted in the correct way.


Some business assets held for at least 2 years before the date of transfer (during lifetime or upon death) will qualify for either 100% or 50% relief from IHT, based on the market value of the asset at the date of the transfer.

This relief can be easily lost if the business does not pass the “wholly or mainly” test during the whole of the 7 years following the date of transfer.  In effect a transfer of a business asset to individuals or into a trust is only potentially exempt from IHT for the next 7 years.

When considering retirement, sale or restructure of your business please speak to our private client team before you commit to any contractual arrangement, so we can advise on an appropriate strategy to maximise the tax reliefs available to you throughout the transition. As a fallback, do please take advice on making your Will in a tax efficient manner just in case.