IHT Business Relief – how it works

The 2024 Autumn Budget announced changes to the IHT relief available for assets qualifying for Business Relief (BR) and Agricultural Relief (AR). This is expected to come into effect from 6 Apil 2026 with anti-forestalling provisions to apply to lifetime transfers between 30 October 2024 and 5 April 2026.  

The qualifying conditions themselves have not changed but the amount of relief will be capped. The first £1 million of qualifying assets will be exempt from IHT and the excess will attract 50% relief (in effect producing a 20% tax rate). The £1m will be shared across assets qualifying for BR and AR on pro-rata basis.  

Another change is that listed shares treated as unlisted shares, e.g. AIM listed, will qualify for 50% rather than 100% IHT relief from 6 April 2026. 

These are seismic changes and business owners should start to consider their longer-term objectives and wishes now, so they are prepared to act ahead of the new rules coming into force.  

At the time of print, we have only seen a Policy Document. A Consultation is expected to commence in early 2025 but we anticipate this will largely be on administrative matters rather than anything that would fundamentally change the proposals.  

What is Business Relief from Inheritance Tax?  

BR is currently a valuable relief from Inheritance Tax (IHT) for business owners. Its purpose is to reduce IHT charges arising on the transfer of qualifying business interests during a person’s lifetime or on their death to allow the business to continue. In many circumstances, it can mean that a business can be passed on free of IHT. 

It is vital to consider the availability of BR proactively in the context of a business owners’ succession or wider estate planning, for example, when the owner wishes to pass the business to the next generation or a family trust.  
  • The basic rules 
  • Excepted assets 
  • Clawback of relief 
  • Relaxation of two-year holding requirement 

The basic rules of Business Relief

BR reduces the value of gifts of Relevant Business Property (RBP), made during lifetime or on death, for the purposes of calculating any IHT due on those gifts. The reduction in value will be either 100% or 50%, depending on the type of asset and ownership.  

In broad overview, the conditions for an asset to qualify as RBP are: 

  1. The assets include a business (carried on by a sole trader or interest in a partnership), shares in an unquoted company or assets held personally used in a qualifying business.  
  2. Ownership throughout the two-year period leading up to the transfer. 
  3. The business must be carried on with the intention of making a profit. 
  4. There is not a binding contract for sale of the asset. 
  5. Companies must not be in liquidation or winding up. 
  6. The business must not consist “wholly or mainly” of dealing in shares, land or buildings or making or holding of investments. 

All these tests need to be passed at the time of the gift (i.e. when a lifetime gift is made or on death) for the asset to qualify for relief. 

It is common to refer to a qualifying business as ‘trading’ although the provisions are slightly nuanced in that any shareholding in an unlisted company can qualify for BR unless it undertakes a disqualifying activity (see 6 above). It is a different test compared to capital gains tax (CGT) Business Asset Disposal Relief or the corporation tax Substantial Shareholdings Exemption, but some principles are similar.  

Relief is available for a controlling interest in a quoted company, but such circumstances are rare. Shares listed on AIM are treated as unquoted for these purposes.

Excepted assets

Once you have confirmed that an asset is RBP, it is necessary to consider if there are any excepted assets within the business / company.  

The value of any excepted assets is left out of account for the purposes of BR (i.e. they remain chargeable to IHT). Excepted assets are any assets not used wholly or mainly for the purposes of the business and not required for future use in the business. 

This would include assets held within a business / company for personal use (e.g. property investments) and could also include large cash balances where the cash is not required for current or future business purposes.  

If there are excepted assets within the business, BR can still be available, but it will be reduced proportionally so that no relief is given for the excepted assets.  

In some cases, a ‘hybrid’ trading and investment business may qualify in full for BR.  

There is clawback of BR in certain circumstances, for example on lifetime gifts if the person dies within seven years and the recipient no longer owns the property or if the asset no longer qualifies as RBP. 

Relaxation of two-year holding requirement

If RBP is transferred from one spouse or civil partner to the other on death, the survivor is automatically credited with the ownership period of the deceased spouse or civil partner.  

There is also a relaxation of the two-year holding requirement when RBP is replaced by new property, which is also RBP, within five years. 

Reform of the rules applying from April 2026   

From April 2026, the first £1 million of combined agricultural and business property will continue to receive 100% relief, with 50% relief on amounts over £1 million.  

Business relief for shares that are not listed on a recognised stock exchange, which includes AIM shares, will reduce to 50%. The £1m allowance does not apply to these shares.  

Assets that receive 50% relief are subject to an effective IHT rate of 20%, as opposed to the main rate of 40%.  

The £1 million will effectively be a ‘lifetime allowance’, covering the estate on death, failed gifts in the seven years before death and lifetime transfers into trust. Any unused allowance will not be transferable between spouses.  

Trusts will receive a combined £1million allowance. However, where a settlor has settled multiple trusts before 30 October 2024, each of those trusts will have its own £1million allowance.  

Anti-forestalling provisions

An individual can make a lifetime transfer, e.g. a transfer to a trust, before 6 April 2026 based on the current rules. However, for gifts made from 30 October 2024 onwards, if that individual dies after 5 April 2026 and death is within 7 years of that transfer, any resulting IHT liability will be calculated by reference to the new rules. 

Recommended action for business owners 

  1. Business owners should regularly review their business operations to check the BR position and plan accordingly. Actions can potentially be taken to ensure or enhance the BR qualifying status. This is even more important in light of the proposed changes.  

  1. It is possible, in some circumstances, to apply to HMRC for advance clearance on the availability of BR. This can only be done where a chargeable transfer is being contemplated, e.g. a transfer to trust. A holdover relief claim for CGT can also be made at the same time so there is no CGT on the transfer of an asset to a trust. 

  1. Entrepreneurs should be mindful of the replacement property rules, which relax the two-year holding requirement, as long as the new property is acquired within five years. This will continue to be relevant from April 2026. 

  1. Read our article on protecting your family's assets. 

For help and advice on any Business Relief or IHT issue please contact Ben Handley or Tim Lynch.

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