Inheritance Tax (IHT) can significantly impact the estate of a deceased person, particularly when business assets are involved. However, Business Relief (BR) is a valuable tax relief offered by HMRC that allows qualifying business assets to be passed on free or with reduced Inheritance Tax (IHT). BR reduces the taxable value of a business or its assets for IHT purposes. Business ownership is included in the estate for IHT.
How Business Relief Works?
Business Relief applies to businesses, shares and certain assets that are used in a trading business. BR can provide either 100% or 50% relief on the eligible assets which can be transferred either during the owner’s lifetime or through their will. To qualify for the relief, the business or asses must have been owned for at least two years before being passed on.
What qualifies for Business Relief?
Business Relief applies to specific assets, depending on their nature and structure.
100% Business Relief
The following assets qualify for 100% relief, meaning that they are completely exempt from Inheritance Tax:
- A business or an interest in a business (e.g., sole proprietorship or partnerships)
- Shares in an unlisted company
50% Business Relief
Certain assets qualify for 50% relief, reducing their taxable value by half:
- Shares in a listed company where the deceased had control (more than 50% of voting rights).
- Land, buildings, or machinery owned by a deceased person that were used in a business they either controlled or were a partner in.
- Business assets held in a trust but used in a beneficiary’s business
You can only get relief if the deceased owned the business or asset for at least 2 years before they died.
What doesn’t qualify for Business Relief?
You can’t claim Business Relief if the company:
- Deals mainly in the investment activities such as, buying and selling stocks, shares or land.
- Is property letting businesses (e.g., buy-to-let portfolios).
- Is a not-for-profit organisation.
- Is being sold, unless the buyer continues the business and pays mainly in shares
- Is being wound up, unless it is part of a process to maintain business continuity.
You can’t claim Business Relief on an asset if it:
- Qualifies for Agricultural Relief
- Was not mainly used for business in the two years before being gifted or passed in a will.
- Is not needed for future business use.
However, if part of a non-qualifying asset is used in the business, that part might qualify for Business Relief.
Example
If a property is mostly used as personal residence but a portion of it is used as office space for the business, the office space portion might qualify for Business Relief, even though rest of the property does not.
How to Claim Business Relief?
To claim Business Relief, the executor or administrator of the estate must apply when valuing the estate for IHT purposes.
This involves submitting relevant documentation and demonstrating that the assets qualify under HMRC’s rules. For claiming relief, executor or administrator should fill in both form IHT400 (Inheritance Tax account) and schedule IHT413 (Business or partnership interests and assets).
You must use the market value of the business or asset when calculating relief at 50%.
Example Scenario
A business owner, David, passes away, leaving his family-run company worth £900,000 to his daughter. Since David owned the business for more than two years, it qualifies for 100% Business Relief, meaning no Inheritance Tax is due on it.
However, David also owned a commercial property used by the company, valued at £400,000. This property qualifies for 50% relief, meaning only £200,000 is taxable.
Documentation Required
- Business financial statements and records
- Ownership proof of the business assets
- Evidence of asset usage for business purposes
- Valuation reports from independent professionals
Planning for Business Relief
Effective estate planning helps business owners ensure smooth operations and financial stability. Business Relief protects businesses from large tax liabilities, allowing successors to inherit assets without high tax burdens. Strategies include:
- Ensure business assets qualify under HMRC guidelines
- Structure ownership to maintain eligibility for 100% relief.
- Keep detailed records of asset use and business activities.
- Regularly revie business structures to prevent disqualification due to investment-focused activities.
Additional Considerations for Business Relief
- If a business is sold before death, the proceeds may not qualify for Business Relief, requiring alternative tax planning.
- Business Relief can be combined with trusts and gifting strategies to further reduce Inheritance Tax (IHT) liabilities.
- Succession planning, including passing on business interests should be carefully structured to ensure relief is not lost.
Autumn Budget Changes affecting BR
Changes to BR will take effect from 6 April 2026. The 100% rate of relief will continue to apply for the first £1m of the business property, falling to 50% for any value above this threshold. Additionally, the rate of BR will also fall to 50% in all circumstances for shares designated as “not listed” on the markets of recognised stock exchanges, such as AIM.
Conclusion
Business Relief is a crucial tool for reducing Inheritance Tax liabilities and ensuring the seamless transfer of business assets. By understanding this relief, business owners can safeguard their legacy, minimise tax burdens, and secure the financial stability of their successors. Seeking expert financial and legal advice is essential to ensure that business assets are structured effectively, and all available reliefs are fully utilised.
By understanding and utilising Business Relief for Inheritance Tax, business owners can create a more tax-efficient estate plan, ensuring financial security for their successors.
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