Inheritance tax & business property relief

BLP.17 - Inheritance Tax & Business Property Relief

Statute: Inheritance Tax Act 1984 (IHTA). Apply the rules at the relevant transfer/death date. IHT can arise on the death estate, a potentially exempt transfer (PET) if the donor dies within seven years, and a chargeable lifetime transfer (CLT), such as a gift into a discretionary trust. The ordinary lifetime rate is 20% above the available nil-rate band; death within seven years can produce additional tax, taking account of lifetime tax already paid. If the donor pays the lifetime tax, grossing-up may be needed. Do not simply charge a further 40% on top.

Death rates, bands and exemptions (2026/27)

• Nil-rate band (NRB): £325,000. The ordinary death rate is 40% above the available bands after exemptions and reliefs. Chargeable lifetime transfers in the preceding seven years use the NRB first, in chronological order.
• Charity and the 36% rate: a charity gift is exempt under s.23 and does not use the NRB. Under Sch.1A, the lower 36% rate applies to a qualifying estate component if its donated amount is at least 10% of its baseline amount, not simply 10% of the gross or net estate. In a straightforward single-component estate, calculate the chargeable value after reliefs/exemptions, deduct the available NRB, then add the charity-exempt gift back to find the baseline. Survivorship, settled-property and general components are normally tested separately; a qualifying election can merge components. Gifts with reservation have special treatment. Do not assume one qualifying gift reduces tax on every component.
• Residence nil-rate band (RNRB): £175,000, subject to a qualifying home passing to direct descendants and the relevant conditions. It tapers by £1 for every £2 by which the estate exceeds £2,000,000. The taper uses the estate's value immediately before death, before BPR/APR and exemptions (s.8D(5)(d), (g)); deductible debts affect the estate value. A single £175,000 RNRB is fully lost at £2,350,000. A larger brought-forward allowance changes that upper threshold.
• Transferable bands: a claim can transfer the deceased spouse/civil partner's unused percentage of the NRB (s.8A) and, separately, unused RNRB (s.8G). Each increase is capped at 100% of the survivor's corresponding band. The often-quoted £1 million per couple assumes both full transfers, a qualifying residence and no taper; it is not a universal exemption.
• Spouse/civil partner exemption (s.18): generally unlimited. Where immediately before the transfer the transferor is a long-term UK resident but the recipient spouse/civil partner is not, the exemption is capped at the NRB figure (£325,000, reduced by previous amounts taken into account under the exemption) (s.18(2), (2A)). Separate election rules can allow the recipient spouse/civil partner to be treated as a long-term UK resident. The residence-based test replaced the domicile test from 6 April 2025. Do not equate citizenship with long-term residence.

Business Property Relief: establish eligibility before calculating relief

BPR reduces the value transferred attributable to relevant business property. The usual minimum ownership period is two years immediately before transfer (s.106). Ownership alone does not make an investment business qualify.

• Replacement property (s.107): qualifying replacement and earlier property can aggregate at least two years' ownership within the last five years. Relief is limited as if the replacement(s) had not occurred, with specified partnership/incorporation exceptions. Certain share reorganisations preserve ownership periods.
• Inheritance and successive transfers (ss.108-109): ownership of inherited property starts at the death, not completion of administration; a deceased spouse/civil partner's ownership period also counts. A qualifying earlier relieved transfer followed by another transfer can disapply the two-year requirement where the statutory conditions are met and at least one transfer is on death. This is not a general exemption for every inherited business.
• Property eligible for the 100% rate, subject to the allowance: a business or interest in a business (including a sole trade or partnership interest); qualifying unquoted securities giving control; and other qualifying unquoted shares within s.105(1)(a), (b), (bb). For straightforward private-company shares, establish that they are not listed or traded on any exchange. A trading company can still contain excepted assets.
• 50% categories: qualifying quoted controlling holdings; unquoted shares traded on a recognised stock exchange (the AIM-type category, s.105(1)(aa)); unquoted securities traded on a recognised stock exchange that gave the transferor control (s.105(1)(ab)); unquoted shares traded on an exchange outside the UK that is not a recognised stock exchange (s.105(1)(ac)); and controlling unquoted securities traded on such an exchange (s.105(1)(ad)). "Unquoted" means not listed and does not by itself establish the 100% rate. An ordinary minority holding of listed shares does not qualify merely because it has been held for two years.
• Personally owned business assets: land/buildings, machinery or plant used wholly or mainly for a business carried on by a company the transferor controls or a partnership of which the transferor is a partner can qualify at 50% (s.105(1)(d)). Merely letting property to someone else's business is insufficient. The transferor's partnership interest, or the shares or securities of the company carrying on the business, must themselves be relevant business property (s.105(6)); the use requirements in s.112(3) normally require two years immediately before transfer, with replacement/successive-transfer provisions. Section 105(1)(e) separately covers qualifying settled assets used in a business carried on by a transferor entitled to the relevant interest in possession.
• Investment/dealing exclusion (s.105(3)): a business consisting wholly or mainly of dealing in securities, stocks or shares, land/buildings, or making/holding investments is generally excluded. Distinguish that business-level test from the asset-level rule below; s.105(4) contains exceptions for qualifying holding companies and specified market-making activities.
• Excepted assets (s.112): remove their value from the relief calculation. An asset is excepted if it was neither used wholly or mainly for the business throughout the whole or last two years of the relevant ownership period nor required at transfer for future business use. Either qualifying past use or a present requirement for future use can therefore prevent exclusion. Group-company use counts subject to the statutory membership and s.111 conditions. Mainly personal use benefiting the transferor or a connected person is not qualifying business use (s.112(6)). An exclusively business-used part of land/buildings can be considered separately with appropriate apportionment (s.112(4)). The separate s.112(3) rule governs personally owned assets under s.105(1)(d).

Reform from 6 April 2026: the shared 100% allowance

Finance Act 2026 s.65 and Sch.12 amend ss.104/116 and insert Chapter 2A. Property eligible for the 100% rate receives that rate only within the available £2,500,000 allowance, shared between BPR and APR. Qualifying excess receives 50% relief; property in a 50%-only category does not use this 100% allowance. Relevant-property trusts have separate allowance and transitional rules, not an automatic personal £2.5 million allowance each.

• Seven-year use (s.124D): reduce the allowance for amounts already relieved at 100% on chargeable transfers in the preceding seven-year allowance period. The statutory period includes transfers earlier on the death date for the death transfer. Same-day lifetime transfers can require proportionate allocation; on death, insufficient allowance is allocated proportionately among eligible properties.
• Transfer on death (ss.124E-124F): on claim, a surviving spouse/civil partner's final allowance can increase by the first deceased's unused percentage, subject to a maximum 100% increase, including multiple deceased spouses. It is not a transfer to enlarge the survivor's lifetime allowance. A first death before 6 April 2026 is treated as leaving 100% unused (Sch.12 para.16). This can produce £5 million at the survivor's death before accounting for their own prior allowance use. The normal claim period is four years from the end of the month of the survivor's death or, if later, six months after the personal representatives first act; HMRC can allow longer.
• Timing/anti-forestalling (Sch.12 para.17): the general start is 6 April 2026. However, a PET or CLT made after 29 October 2024 and before 6 April 2026 is recalculated under the specified new rules if the donor dies on/after 6 April 2026 within seven years. Do not teach that every pre-April 2026 gift has unlimited 100% relief. A death on 20 January 2026 remains under the pre-reform regime.

Lifetime gifts: retaining relief when the donor dies within seven years

• Section 113A: ordinarily the donee must own the gifted property continuously until the donor's death, and it must still be relevant business property then (ignoring the two-year minimum). The latter condition has a specific shares/securities exception: property quoted at the gift, or property within s.105(1)(aa)-(bb) at the gift that remained unquoted throughout. If the donee dies first, their death is the relevant endpoint. Partial satisfaction yields proportionate relief. For a failed PET, relief is lost unless these conditions are met. For a CLT, if these conditions are not met, the relief given in calculating the lifetime tax stands, but the additional tax on death is calculated without it (s.113A(2)), and that transfer is then ignored in computing the s.124D allowance (s.113A(2A)).
• Section 113B replacement: after disposal, relief can survive if the whole consideration is applied to qualifying replacement property, acquired or contracted for within three years or a longer HMRC-allowed period. Both disposal and acquisition must be at arm's length or on arm's-length terms. Continuous ownership of original/replacement property is required apart from the replacement gap, and the replacement must satisfy the statutory business-property condition. Qualifying post-donor-death replacement within the allowed period is possible under s.113B(5); death does not automatically end the replacement opportunity. Cash left on deposit is not qualifying replacement property.

Calculation traps

• Apply BPR to the eligible value before the NRB, but test RNRB taper before BPR/APR.
• Example: a £3 million business includes £400,000 of excepted assets. With a full £2.5 million allowance, the £2.6 million eligible value leaves £50,000 after relief. Add back the unrelieved £400,000: £450,000 remains before other exemptions/bands.
• 50% relief is not a 50% tax rate. At the ordinary 40% death rate, an unexempt excess above the bands bears an effective 20% charge; at 36%, it is 18%. Exempt or band-covered value is not charged.
• A failed PET uses NRB chronologically. Taper relief reduces tax, not transferred value, for gifts more than three years before death; it does not create relief where no tax is payable on the gift.
• BPR is an IHT relief, distinct from Business Asset Disposal Relief for CGT.

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