Business Property Relief (BPR), now commonly known as Business Relief (BR), has been a fundamental aspect of Inheritance Tax (IHT) planning in the UK for over four decades. Since its introduction in 1976, BR has played a critical role in protecting businesses from a potentially burdensome 40% Inheritance Tax bill upon the death of an owner.

This article traces the evolution of BPR from its inception to the present day, exploring its impact on estate planning and the opportunities it provides for financial advisers and their clients through Business Relief investments.

The birth of Business Property Relief (1976)

Business Property Relief was introduced as part of the 1976 Finance Act to help family-owned businesses survive the transition from one generation to the next. The legislation aimed to prevent businesses from having to sell off assets or close down due to the Inheritance Tax burden imposed upon the death of the owner.

The primary purpose of BPR was to protect and promote the continuity of family-owned businesses, recognising their importance to the UK economy. By alleviating the Inheritance Tax burden, BPR sought to ensure that businesses could remain in the family, maintain employment, and continue to contribute to the local and national economy.

Early evolution and expansion (1980s-1990s)

Throughout the 1980s and 1990s, Business Property Relief underwent a series of reforms aimed at broadening its scope and increasing the level of relief available. The percentage of relief gradually increased, providing more significant tax advantages for qualifying businesses. The expansion of BPR also saw more types of business assets being brought within the scope of the relief, enabling a wider range of businesses to benefit from reduced Inheritance Tax liabilities.

A key milestone in the evolution of BPR was the Finance Act 1992, which expanded the range of assets eligible for relief and increased the relief percentage. By the early 1990s, the relief had been extended to cover land, machinery, and buildings used in a business, provided they met the necessary conditions. This period marked a crucial development phase for BPR, as it became increasingly integrated into the tax planning strategies of advisers and their clients.

The rise to 100% relief (1996)

A significant change to Business Property Relief came in 1996 when the government decided to increase the relief to 100% for certain qualifying assets. This change meant that the entire value of eligible business assets could be passed on without incurring any Inheritance Tax liability, significantly enhancing the attractiveness of BPR as a tool for estate planning.

The decision to raise the relief to 100% was driven by a desire to provide greater support to family-owned businesses, which were seen as a vital component of the UK economy, with a staggering c.99% (or 5.5m)^[1] of UK businesses falling into the SMEs category. At the start of 2023, by offering complete relief from IHT on qualifying business assets, the government aimed to encourage entrepreneurship and ensure that businesses could be passed down through generations without the potential of tax-induced liquidation.

The increase to 100% relief reshaped estate planning strategies, particularly for families with significant business assets. It triggered a substantial rise in the use of BPR as financial advisers and their clients sought to mitigate the potential tax liability of their client's estate. By allowing the full value of eligible business assets to pass to beneficiaries free of Inheritance Tax, BPR became a pivotal tool for reducing IHT liabilities. This made it especially attractive for business owners looking to preserve family enterprises across generations without the possibility of forced asset sales or tax-driven restructuring.

Business Relief legislation was also expanded to cover private investors with shares in qualifying businesses, not just the owners or proprietors of the business. This inclusion served to encourage investments in UK businesses.

Inheritance Tax relief legislative updates (2024)

Following the Government’s Autumn Budget in October 2024, several important changes to Inheritance Tax (IHT) are set to come into effect, affecting financial planning for both advisers and clients. Until April 2026, the current 100% IHT relief on assets that qualify for Business Relief—including those invested on the AIM market—will remain in place.

From April 2026, this relief will be modified. Business and agricultural assets qualifying for Business Relief will receive 100% IHT relief on the first £1 million in value (in addition to the current Nil Rate Band and Residence Nil Rate Band worth up to £500k per individual), with any additional value subject to IHT at a reduced rate of 20%. This adjustment will impact unlisted inheritance tax solutions and private family businesses. AIM-listed companies that qualify for Business Relief will also see their IHT relief rate halved to 20%, regardless of the investment size.

Key legislative changes and their effects

Over the years, there have been several amendments to the BPR investment rules, each shaping how financial advisers approach estate planning.

• The two-year ownership rule: Introduced to prevent the abuse of BPR, this rule requires that an asset must be owned for at least two years before the death of the owner for it to qualify for relief. This change aimed to prevent individuals from purchasing BPR-qualifying assets shortly before their death solely to avoid Inheritance Tax.
• Changes in qualifying criteria: The definition of qualifying businesses and assets has been refined over time. For example, certain types of businesses, such as those mainly dealing in investments or property, are excluded from BPR. The tightening of these criteria has made it essential for advisers to thoroughly assess whether a client’s business or assets qualify for relief.

These legislative changes have added complexity to BPR planning, requiring advisers to stay informed about the latest developments and ensure compliance with all requirements to secure the relief for their clients.

The modern Business Property Relief landscape

Today, Business Property Relief remains a critical element of Inheritance Tax planning, offering substantial opportunities for tax-efficient wealth transfer. Financial advisers must be aware of the various Business Property Relief investments available in the market. It is important to note that businesses must conduct a qualifying trade so not all will qualify.

What types of businesses qualify for BR today?

• Shares in unlisted companies (those not listed on the London Stock Exchange). Private companies that operate in sectors such as energy and infrastructure, social care, elderly care, hospitality, and many more.
• Shares in certain AIM-listed companies. Originally known as the Alternative Investment Market, AIM is a place for small, ambitious and growing UK companies to gain investment to help them succeed.
• Interests in trading businesses: Available to individuals who own or hold an interest in a sole trader business or partnership.

What types of companies don’t qualify for Business Relief?

Businesses that are listed on a main stock exchange do not qualify for BR. Also excluded are businesses that deal with investments, securities, stocks or shares, or land or buildings.

What types of BR products are available today?

• AIM investment funds
• BR-qualifying privately trading companies
• BR-qualifying investment funds

Many financial advisers choose to diversify across multiple BR products and combine their various strengths to help manage risk while providing IHT relief. A diversified portfolio can consist of investments in AIM, private companies, renewable energy projects, asset-backed businesses and more.

Current opportunities in BPR-qualifying investments

Effective until April 2026

Business Property Relief has evolved to provide significant planning opportunities, particularly in the context of AIM listed shares. Shares in qualifying AIM companies are currently eligible for full IHT relief after two years of ownership, making them an attractive option for clients looking to reduce their IHT liability while maintaining a growth-focused investment portfolio. Similar options are available for clients who hold shares in an unlisted business relief investment portfolio, which can also provide full relief after two years providing certain conditions are met.

Effective after April 2026

The IHT relief threshold will change for Business Relief qualifying investments in unlisted and AIM investment portfolios. This change will take place in April 2026. For more details, please see section: Inheritance Tax relief legislative updates 2024.

Challenges faced by advisers and investors in the BR market

While Business Relief offers substantial benefits, there are challenges to consider. The qualification criteria for BR can be complex, and legislative changes can impact which assets are eligible. Advisers must be diligent in their assessment of qualifying assets, stay informed about changes, and ensure that clients' investments align with BPR rules.

Who can benefit from Business Relief?

Business owners, heirs, investors, family businesses, high-net-worth individuals and an increasing number of middle-income families can benefit from business relief. After two years of ownership, BR allows assets from trading businesses, AIM shares, and certain investment products to be passed on free of IHT up to the first £1m of assets (in addition to the current Nil Rate Band worth up to £500k per individual), after which the IHT on all assets will be 20%, helping to preserve wealth and business continuity across generations.

The risks involved with Business Relief

Capital at risk: The value of a BR-qualifying investment portfolio will depend on the performance of the underlying companies it invests in. You may get back less than you invest.

The rules may change: Your tax treatment depends on your current circumstances, and this may change. Also, whether the investment qualifies for BR will depend on the portfolio companies maintaining their qualifying status.

Shares could be volatile and less liquid: Shares in AIM-listed or non-listed entities might be more susceptible to market volatilities than those listed on the London Stock Exchange.

Business Relief – an effective tool for Inheritance Tax planning

Since its inception in 1976, Business Relief has evolved into a powerful tool for Inheritance Tax planning in the UK. As the business and regulatory landscapes continue to evolve, Business Relief will remain a crucial consideration for financial advisers and their clients. Staying abreast of potential changes to BPR legislation and adapting strategies accordingly will be vital for maximising the benefits of this relief in the future.

To explore how Business Relief could play a role in your clients' estate planning strategies, please don’t hesitate to contact our team.

‍Opinions expressed represent the views of the author at the time of publication, are subject to change, and should not be interpreted as investment or tax advice.

Important notice: This article is for investment professionals only. This article is for information only and does not form part of a direct offer or invitation to purchase, subscribe for or dispose of securities and no reliance should be placed on it. No reliance should be made on this content to inform any investment of tax planning decision.

This content contains information that is believed to be accurate at the time of publication but is subject to change without notice. The explanation of all of the tax rules set out have been written in accordance with our understanding of the law and interpretation of it at the time of publication.

Whilst care has been taken in compiling this content, no representation or warranty, express or implied, is made by Downing as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.

References

^[1] Percentage of UK businesses as SMEs