Business Relief & IHT

The relief can reduce the charge to IHT by 50% and even 100% on business assets of unlimited value. This applies not only to those who are actively engaged in a business but also to those who simply hold shares in the right type of company.

If you own business assets, business relief (BR) is a very valuable relief from IHT which can reduce the taxable value of those assets to nil. We look at the fundamentals of BR and how it might benefit your estate.

How does business relief work?

Business relief works by reducing the taxable value of business assets by either 50% or 100% depending on the nature of the asset and how it is used. To qualify, you must have owned the business interest, shares or asset for at least two years before death.

Broadly, IHT is payable at 40% on estates which exceed £325,000 in value (£650,000 for a married couple or couple in a registered civil partnership.) All estates can potentially qualify for further reliefs from IHT with probably the most used IHT relief being spouse relief which applies when assets are left to a surviving spouse or civil partner.

It is important to note that not all businesses will qualify for BR. For instance, you can’t claim BR if the business of the partnership or company is wholly or mainly engaged in dealing in land or buildings, securities, stocks or shares, or in making or holding investments.

This would exclude businesses where the business simply held a number of properties, and the main purpose of the business is to rent these properties. For example, Lee owns a 70% shareholding in an unquoted industrial cleaning partnership worth £750,000. He also owns an office block valued at £250,000 which he lets to the company. If business relief was not available these assets would potentially attract an IHT bill of £400,000. However, the shares in the company should receive 100% business relief reducing the tax bill on them to nil; the office block should receive 50% relief as an asset used in a business, reducing its taxable value to £125,000 and the total tax bill to £50,000.

What assets qualify for business relief?

To qualify for business relief the following assets must be owned for two years in order to benefit from BPR. Agricultural Property will benefit firstly from Agricultural Property Relief but if this is not available, the asset may qualify for BR if it is a business asset.

How is business relief claimed?

If you pass away owning business assets, business property relief can be claimed by your executors when they submit details of your estate to HMRC before applying for a grant of Probate to your estate.

Lifetime planning and BR

The best course of action is, however, to take action while you are living to ensure any later claim for business relief is maximised. Carefully drafted Wills, for example, can enable both spouses to take advantage of BR and to put assets outside of the IHT net on the second death.

Succession planning to benefit the next generation is also key to making the most of business relief. Occasionally it’s necessary to make some adjustments to the way that assets are owned to qualify for BR or to benefit from its highest rates. In our example above Lee may well have been advised to transfer ownership of the office block to the company in order to benefit from 100% BR.