How your clients could use Business Property Relief to reduce tax

Business Property Relief is a tax relief that can help business owners reduce the amount of Inheritance Tax (IHT) they have to pay when they die. This can be a huge help for business owners who want to pass their business on to their beneficiaries.

In this article, you will discover how Business Property Relief can help your clients reduce their Inheritance Tax bills.

Why Business Property Relief exists

Business Property Relief (BPR) originated in the 1976 Finance Act, and has changed a lot since.

Initially, its aim was to ensure that, after a business owner’s death, a family-owned business could continue to survive and trade, without needing to close or be sold to pay IHT. Over the decades, UK governments have continued to value protection of businesses of this kind.

How Business Property Relief works

If your client has a business or an interest in a business, whether a sole trader, partnership, or limited company, they can claim 100% relief provided it’s inherited as a going concern. This means it is exempt from Inheritance Tax.

Clients can get 100% relief on:

  • A business or interest in a business
  • Shares in an unlisted company

They can get 50% relief on:

  • Land, buildings, plant or equipment they own and that is wholly or mainly used by the business
  • Shares controlling more than 50% of the voting rights in a listed company
  • Land, buildings, plant or equipment used in the business and held in a trust that it has the right to benefit from.

Note that clients must have owned the business or asset for at least two years to claim the relief.

Conversely, there are some instances where the relief is not available. For example, the following businesses do not qualify if more than half of the business involves:

  • Dealing in stocks and shares
  • Dealing in land or buildings
  • Making and holding investments.

How to qualify for Business Property Relief

To qualify for Business Property Relief, the property must meet certain criteria. First, it must be “business property” as defined by the Inheritance Tax Act. This includes things like shares in a trading company or business premises.

Second, the property must be used for business purposes and must have been owned for a certain period, usually two years.

If your client meets these criteria, they may be able to use Business Property Relief to reduce their Inheritance Tax bill.

If your client owns a business, it’s important to discuss Business Property Relief so they can take steps to protect their beneficiaries.

How Business Property Relief can benefit your clients if they are investing in a business

Your clients can take advantage of this valuable relief even if they are not a business owner themselves.

For example, perhaps your client is aware that they have an Inheritance Tax liability, but:

  • They find trusts too complicated
  • They don’t want to give away large sums of money
  • Their beneficiaries are too young to inherit now
  • They want to retain access to their money in case they need it.

Investing in shares that are expected to qualify for Business Property Relief means your client could pass these on free from IHT on death, as long as they have held the shares for at least two years at that time.

Additionally, the investment would stay in your client’s name, meaning they should be able to access the capital later on if they need it.

The benefits of a Business Property Relief qualifying investment include:

  • Clients can pass such an investment free of IHT after two years (a client would normally have to wait seven years after making a gift for it to fall outside their estate)
  • The client retains control as the wealth remains in their name
  • Such an investment does not use the IHT nil-rate band, meaning clients can use this band on assets which are difficult to place outside of the estate for tax purposes.

It’s worth remembering that investments that qualify for Business Property Relief can’t be listed on a main stock exchange. So, they are likely to be smaller, riskier companies where the value could fall, and clients could get back less than they invest.

In addition, tax rules could change in the future and so there is no guarantee an investment will continue to qualify for the relief in the future.

Get in touch

If you have clients who own a business, or have potential IHT issues they are looking to address, Business Property Relief could be a useful way of mitigating a tax bill.

If you have clients who may benefit from our advice, or for more information, please contact us. Email or call us on 0345 505 3500.

Please note

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.