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Business relief

Business Relief (formerly known as Business Property Relief) reduces the value of business property for inheritance tax. It's available on the transfers of business asset during lifetime or on death. To qualify the business asset must usually have been owned throughout the two years prior to death or transfer.

Relief is given to ensure that following the death of a business owner, a family-owned business can survive as a trading entity without having to be sold or broken up to pay an inheritance tax liability. But it's also available to private investors who invest in qualifying businesses. 

Investing in shares which qualify for business relief is a popular estate planning option. It has two key benefits over more traditional gifting as a means to reduce the estate.

• The investment will be outside the estate after two years rather than seven years for gifts which are PETs or CLTs
• The investor retains access to the investment and any dividends which are paid

However, these benefits must be balanced against the increased investment risk of investing in smaller unlisted companies and the risk that business relief may be withdrawn if in the future the business no longer qualifies - for example, if the business becomes publicly listed.

Rate of relief

100% relief:

• A trading business or interest in a trading business (includes sole traders and partnerships)
• A holding of shares in an unquoted company generally smaller companies not listed on recognised stock exchange  (including Alternative Investment Market (AIM) companies)
• EIS investments
• A £1 million limit to relief is to be introduced from 6 April 2026

50% relief:

• A controlling holding of shares in a quoted company - i.e. where the individual controls more than 50% of the voting rights
• Land, buildings, machinery or plant used wholly or mainly for the purposes of the business carried on by a company or partnership
• AIM shares where death or transfer is made after 6 April 2026
• From 6 April 2026 any qualifying business assets in excess of the £1 million allowance

Business relief is not available on:

• Investment businesses -  there's no relief where the business wholly or mainly  deals in securities, stocks and shares, land or buildings, or making or holding investments, including shares in a company which carries on such a business.
  
  This means relief is not available to landlords with rental property and furnished holiday lets, unless the level of additional services provided is so high that the activity is deemed to be a trading activity. Specialist advice is required in this these cases.
• Excepted assets - assets which have not been used wholly or mainly for the purpose of the business throughout the two years before the transfer and are not required for future use in the business are ignored when calculating the amount of relief available. A typical example would be large reserves of cash in excess of any reasonable business requirements, or any other investments held by the business, e.g. Bonds or OEICs.
• Businesses that are subject to a contract for sale or being would up, including assets subject to a Buy and Sell Agreement.

From April 2026, 100% relief will be limited to the first £1 million of qualifying assets. This new £1 million limit will apply to the combined value of qualifying agricultural and business property.  Qualifying assets over the £1 million cap will have relief restricted to 50%, resulting in an effective rate of 20%. 

Shares which aren't listed on a recognised stock exchange, including AIM shares, will be subject to relief at 50% on the entire holding and will not count against the £1 million allowance.

Ownership period

To qualify for business relief an asset must have been owned for two or more years.

However, where a widow(er) inherits business property on the death of their spouse/civil partner, the surviving spouse’s ownership period is deemed to commence when the deceased spouse acquired the asset.

This does not apply if the asset was transferred to a spouse during lifetime. In these circumstances, the spouse will not quality for relief until they've personally owned the asset for two years. 

Replacement property

If an asset which qualifies for business relief is sold, the relief can be maintained if the asset is replaced by the purchase of a new business asset. The two year ownership period is not reset if the sale proceeds are used to purchase a replacement asset within three years of the sale of the original asset.  

Business relief continues to be available if the combined ownership period of the original property and any replacement property covers at least two out of the five years immediately before transfer/death. If the individual dies before the replacement asset is purchased business property relief will be lost. 

Where one or more replacements have been made during the five years period, the amount of relief cannot be more than what it would have been had the replacement property not been made.  This prevents selling an asset which receives relief at 50% and replacing with an asset which benefits from relief at 100%.

Where business property has been gifted the purchase of fresh business property will not count as a replacement property and a fresh two year qualification window will commence.

Gifting business assets

Often the principal consideration when gifting business assets is to ensure the continued smooth running of the business when the business owner retires or dies. Particularly for family businesses, ensuring that the shares and voting rights remain in the hands of the key decision makers may be of critical importance. This may mean that tax planning is secondary to business succession planning.

Where the business assets are held as an investment, such as in the case of AIM shares, tax planning may be of greater importance. There's currently no IHT payable on shares which qualify for 100% business relief but, their value is included in the ‘net estate’ which can affect eligibility for the residence nil rate band (RNRB).

There will be an IHT charge on the gift of assets which only qualify for 50% relief. After 6 April 2026 this will include gifts of AIM shares and other qualifying business/agricultural assets if the donor has already utilised their £1M limit.

Gifts to individuals on death

No IHT will be payable on death if the assets qualify for 100% relief and were owned by the deceased for at least two years prior to death. 

The individual who inherits the business assets will immediately benefit from business relief on those assets provided the two year ownership period had been met on the death of the original owner and the asset still qualifies as a relevant business asset.

Where the deceased had not met the two year ownership period and subsequently no business relief was available on death, the two year ownership for the new owner of those assets will commence from the date of death. The exception to this is where the assets are inherited by a spouse or civil partner. In these circumstances it is possible to use the combined ownership period to determine eligibility.   

Lifetime gifts to individuals

Lifetime gifts of business assets can benefit from business relief provided they were owned by the donor throughout the two years before the transfer. This means business owners don't have hold on to the qualifying assets until their death to obtain relief. 

However, relief is withdrawn and the gift becomes a failed PET if the donor dies within seven years of making the gift and the recipient no longer owns the asset or the asset no longer qualifies for business relief.  These rules do not apply to lifetime gifts to spouses or civil partners, which are covered by the spousal exemption. A new period of ownership starts from the date of the gift and the spouse receiving the gift won't quality for relief until they've owned the asset for two years.

The planned changes to Business Relief from April 2026 have an immediate effect for lifetime transfers of business assets.  The new rules will apply for lifetime transfers on or after 30 October 2024 if the donor dies on or after 6 April 2026. This is to prevent lifetime gifts being made ahead of the new rules in the hope of securing 100% relief should the donor pass away witin 7 years. 

For example, a lifetime gift of unquoted shares of £2 million made on or after 30 October 2024 will be a failed potentially exempt transfer if the donor dies within 7 years. 100% relief would apply to the first £1 million and 50% to the next £1 million under the new rules if the recipient owned the shares until the donor's death and the donor's death is on or after 6 April 2026.

The £1 million allowance is not a lifetime allowance and will refresh every 7 years. Gifts, where the donor has survived 7 years will not use the £1 million allowance.  

Gifting to discretionary trusts

IHT on lifetime transfers

Assets which qualify for 100%  business relief are not subject to IHT so generally there's no IHT benefit of transferring them into a discretionary trust. However, there may be other motives for doing so, such as:

• Retaining the residence nil rate band by bringing the value of the net estate below the £2M taper threshold
• CGT deferral on disposal of the assets by claiming holdover relief – however, this would result in the loss of CGT Business Asset Disposal Relief (formerly known as entrepreneurs relief)
• Asset protection or control which may be important if the assets are shares in a family business

There’s no IHT payable when qualifying business assets which attract 100% relief are transferred into a discretionary trust. This means that there is no need to limit the amount transferred to less than the available nil rate band to avoid a 20% lifetime IHT charge. However,  to avoid the settlor being assessed to IHT on their death, the trustees must retain ownership of the business assets (or any replacement business property) for seven years or until the death of the settlor, if earlier. 

Transfers to discretionary will trusts

No IHT will be payable on the transfer of qualifying business assets (which qualify for 100% relief) into a discretionary will trust. The transfer of the assets into trust doesn’t use any of the deceased IHT nil rate band, meaning it remains available to use against other assets in the estate.

Periodic charges 

Trustees will have to satisfy the two year ownership period on any business assets within the trust before they qualify for relief. Business relief reduces the value of the business property for the purpose of the ten yearly periodic charge calculation. Therefore, if the only assets in the trust at the ten year anniversary are assets which qualify for 100% business relief, there will be no periodic charge.

The changes to business relief will apply also to relevant property trusts for the purpose of periodic and exit charges.  However, the date the trust was established may affect how much 100% relief is avaialble.

• Trusts created before 30 October 2024 and which held qualifying business property before this date, will each have their own £1M allowance applicable from the first 10 year anniversary after 6 April 2026
• There will be a single £1 million allowance for all trusts created by the same settlor after 30 October 2024. The allowance will be applied in chronological order.

Exit charges

Where qualifying business assets are transferred ‘in specie’ to a beneficiary, there will be no exit charge when assets which attract 100% relief leave the trust.

However, exit charges may apply if the assets leaving the trust no longer qualify for relief. This may be the case if the trustees sell the business assets prior to the distribution or the business assets are paid to a beneficiary before the trustees have satisfied the two year ownership period.

Exit charges are based on the IHT effective rate at the previous 10 year anniversary or, for exits in the first 10 years, the ‘deemed effective rate’ when the trust was created.

The deemed effective rate is based on the value of the trust property immediately after the trust was established. At that time the trustees would not have held the business assets for the required two year qualification period and consequently business relief is disregarded when calculating the deemed effective rate which would apply to non-qualifying assets.

After 10 years, if there was no charge at the last 10 year anniversary because the trust property qualified for business relief, there should be no exit charge when capital is distributed to the beneficiaries.

Interaction with Residence Nil Rate Band (RNRB)

The residence nil rate band (RNRB) provides additional nil rate band where someone leaves their main residence to their direct descendants on death. However, the RNRB begins to be tapered once the net value of the estate is more than £2M. £1 of RNRB is lost for every £2 over this limit.

The value used for tapering purposes is the estate (including the value of any settled property which the deceased held a qualifying interest in possession, such as immediate post death interest trusts) after any liabilities are deducted, but before any reliefs or allowances are applied.

So while there’s no IHT on assets which qualifying for 100% business relief, they could result in the loss of the residence nil rate band as the relief is ignored when determining whether the taper applies to an estate.

Lifetime gifts to avoid tapering

Lifetime gifts (including death bed gifts) aren’t included in the net estate for tapering of the residence nil rate band. Gifting qualifying business assets, either to an individual or to a trust, can reinstate the RNRB if the net estate is reduced to £2M or less. However, individuals making lifetime gifts need to be careful that the gift doesn’t affect business relief. The recipient of the gift must retain ownership of business assets (or replacements) for seven years, or until death if earlier, for relief to remain available on the initial gift.

Will planning

If business assets are inherited by the surviving spouse it could lead to the RNRB, including any transferable RNRB from the first spouse, being tapered on the second death. If the business assets are placed in a discretionary trust, the spouse can be included as a potential beneficiary if needed, but it would keep the business assets outside of the estate for tapering purposes and may help retain the RNRB.

If the surviving spouse is given a life interest in qualifying business assets, the holding will immediately qualify for business relief, as long as the holding is maintained. However, they will be taken into account when determining the availability of the life tenant’s RNRB. When qualifying business assets are passed to the remaindermen of the trust, a new two year ownership period will start. 

ISAs holding AIM shares

AIM shares can be held within stocks and shares ISA. These shares typically qualify for business relief after two years of ownership which means the ISA would be free of IHT.

The two year ownership period will apply where AIM shares are purchased with new subscriptions or existing funds are switched to AIM shares within an ISA. The replacement property rules will apply where qualifying AIM shares are sold and repurchased within the ISA, meaning that the ownership period does not reset when the shares are purchased by the ISA manager. However, if the client instructs the ISA manager to repurchase more shares than the original amount sold, any additional shares must start a new two year period.

Borrowing to acquire qualifying business assets

It’s no longer possible to reduce the value of an estate for IHT purposes by securing a loan to acquire property qualifying for business relief.

Where money is borrowed to acquire assets qualifying for business relief, the amount of loan firstly reduces the value of the assets that qualify for relief. This is the case regardless of whether the loan is secured against the business assets. Business relief is given against the net value of the asset after deduction of the loan. Any remaining value of the loan can be set against any other assets that are chargeable to tax, as long as the loan is repaid on death.

Changes to Business relief and Agricultural relief from 6 April 2026

Changes to business relief will come into effect from 6 April 2026. However, there are some transitional rules which will apply to qualifying business relief assets after 30 October 2024. HMRC have also issued a consultation on the application in relation to trusts. 

The £1 million allowance

A new allowance will apply to the combined value of property in an estate for 100% business property relief and 100% agricultural property relief. For example,  the allowance will cover £1 million of property qualifying for business relief, or a combined  £400,000 of agricultural property relief and £600,000 business property relief for 100% relief. 

If the total value of the qualifying property to which 100% relief applies is more than £1 million, the allowance will be applied proportionately across the qualifying property.  If there was agricultural property of £3 million and business property of £2 million, the allowance for the agricultural property and business property will be £600,000 and £400,000 respectively.

For qualifying assets over £1 million, relief will be restricted to 50%, resulting in an effective rate of 20%.

Assets which attract relief at 50%, such as AIM shares or property used exclusively for business purposes, will not use up the allowance.  The £1 million allowance cannot be transferred to a surviving spouse or civil partner if unused on death or a lieftime gift.

The allowance covers the following :

• property in the estate at death
• lifetime transfers in the 7 years before death (failed potentially exempt transfers)
• chargeable lifetime transfers (CLTs) where there is an immediate 20% charge.

CLTs will cease to count towards the £1M limit once more than 7 years have passed since the gift was made, meaning rolling gifts of qualifying assets can be made every 7 years as the limit refreshes.

AIM shares 

AIM shares currently benefit from 100% relief.  However, from 6 April 2026 relief will be cut to 50%.

While business relief will still be available at 100% for the first £1 million of qualifying business assets, this new combined allowance for business and agricultrual relief will not apply to AIM shares. 

100% relief will still be given on eligible shares held for two years where death occurs before April 2026. Subsequently, individuals will pay 20% IHT, assuming the nil rate band is fully used by other assets in the estate.  

New investors will not have owned shares for the minimum two year ownership should they die before April 2026 and IHT would therefore be charged at 40%. For deaths after April 2026, tax will be at 20% once held for two years.

Transitional rules

While the new rules don't come into force until 6 April 2026 there are transitional rules which apply to lifetime transfers made after 30 October 2024.

The £1 million allowance will apply to transfers of qualifying assets made after 30 October 2024 if the donor dies after 6 April 2026 but within 7 years of the date of the transfer.  If the donor dies before 6 April 2026 the transfer will be a failed PET, but 100% relief will be available on the full amount of the transfer. 

Chargeable lifetime transfers (CLTs) of qualifying assets in the transitional period will not count towards the £1M allowance provided the settlor survives for 7 years from the date of transfer. 

However, if the setlor dies on or after 6 April 2026 and within 7 years of making the transfer ;

• the value of any property transferred into trust during the 7 years before death will be subject to an Inheritance Tax charge at 40% in the same way as a failed PET
• the settlor's £1 million allowance will apply to these transfers of qualifying assets and will reduce the allowance available on any later chargeable lifetime transfers or on death

Transfers of AIM shares during the transitional period which become failed PETs/CLTs if the donor died with 7 years of the transfer receive relief at the reduced rate of 50% applying if death is after 6 April 2026.  

There has been no guidance issued on whether there will be any transitional rules affecting replacement property rules.  It remains unclear whether replacing AIM shares ahead of the 6 April 2026 with business property which attracts 100% up to the £1M limit will restart the two years qualification period. 

Trusts  

There will also be a £1 million allowance for trustees holding business in a relevant property trust.  This is a separate from the settlor's own £1M allowance and is for the purpose of calculating periodic and exit charges.  Trusts with a combined value of more than £1 million of qualifying agricultrual and business property will receive 100% relief against ongoing trust charges up to a value of £1 million, and 50% relief thereafter. 

The £1 million allowance for relevant property trust will refresh every 10 years, so that qualifying assets held in that trust benefits from 100% relief up to a value of £1 milion on each  periodic charge. This avoids business property being double counted against the allowance if they are held long term. 

Any exits of qualifying assets between ten year anniversary dates will reduce the allowance available at the next period charge date.

Qualifying business assets settled into trust before 30 October 2024 will become subject to the new rules at the trust's first periodic charge date after 6 April 2026. For qualifying assets settled into trust during the transitional period only exists made after 6 April 2026 will count towards the trust's £1 million allowance. 

There will be a single £1 million allowance where the settlor transfers qualifying assets into multiple trusts after 30 October 2024.  This will be applied to the trusts in chronological order until the allowance has been fully used. Any later trusts will only receive 50% relief on the full value of qualifying business assets. The allowance will not be transferable between tusts even if the earliest trust no longer holds business assets.