Business Property Relief (BPR) is a very valuable Inheritance Tax (IHT) relief for privately owned businesses and was subject to a recent review by the Office for Tax Simplification (OTS). This Insight highlights some key points to qualify for the relief.

Background to BPR

The IHT legislation contains a very valuable relief known as BPR. This relief mitigates the charge to IHT on any transfer of ‘relevant business property’ during lifetime or on death. Where an asset qualifies for this relief, BPR reduces the value chargeable to IHT by either 100% or 50%. BPR is currently an unlimited relief, unlike many other tax reliefs which have a monetary cap, and there is no clawback of the relief if the recipient immediately sells an inherited asset which qualified for BPR in the transferor’s death estate (although there can be a clawback for lifetime gifts).

Given that the current IHT rate on death is 40%, over and above the IHT threshold of £325,000, it is important that owners of privately-owned businesses undertake regular IHT/BPR reviews and that actions are not taken which result in full relief being lost.

Relevant Business Property

‘Relevant business property’ is defined as:

  • A business or an interest in a business, including a partnership (100% relief).
  • Shares in an unlisted company (100% relief).
  • Shares listed on the Alternative Investment Market (100% relief).
  • Quoted shares or securities where the owner has a controlling interest (50% relief).
  • Land, buildings or machinery owned personally and used in the individual’s partnership or a company which they control (50%).

BPR generally only applies where the ‘relevant business property’ has been held for at least two years. However, on a transfer of business interests to a surviving spouse/civil partner on death the spouse inheriting can include the deceased’s ownership period. Also, incorporation of a business does not generally affect the two-year ownership.

For BPR to apply, the business must not consist ‘wholly or mainly’ of holding investments. The legislation does not define ‘wholly or mainly’ but case law has established this as a 50% or more test. A hybrid company with trading and investment activities may qualify for BPR providing that the investment activities are not the main part. The business is looked at in the round along with such factors as:

  • The turnover and level of profitability relating to each part of the business.
  • Capital employed in each part of the business.
  • Management and employee time spent in each part of the business.

Having established that there is ‘relevant business property’, BPR is restricted by the value of any ‘excepted’ assets which are defined as assets not used wholly or mainly for business purposes in the two years immediately before the IHT event or not required for future use in the business. These will include assets such as surplus cash, yachts and houses which are used personally by the shareholders.

Qualifying for BPR and Not Qualifying

For certain types of businesses, there is a fine line between qualifying for BPR and not qualifying due to wholly or mainly holding investments. Recent tribunal cases have looked at the level of activity which is necessary for a livery and a holiday letting business to qualify. As a general rule, BPR is unlikely to be available for these and similar businesses unless substantial additional services are provided.

For example, in the case of HMRC v Personal Representatives of the Estate of M Vigne [2018], it was found that additional activities supplied by a livery, such as providing the horses with hay feed during the winter months, removing horse manure from the fields, checking the general health of each horse on a daily basis and providing on-site security, were sufficient to show that the business was not mainly one of holding investments, such that BPR was available.

By contrast, it was concluded in the case of HMRC v Mrs NV Pawson’s Personal Representatives [2013] that there was nothing to differentiate the business from any other furnished holiday letting business and BPR was not available on the basis that the business was mainly one of holding an investment.

Each case is decided on its own facts and it is particularly important for a full BPR review to be carried out in borderline cases as there may be actions which can be taken to help strengthen the position.

The Office of Tax Simplification (OTS) – Inheritance Tax Review 2nd Report July 2019

The OTS in their July 2019 IHT review have proposed a number of changes. BPR is covered in this report and they have commented that the ‘wholly or mainly’ test (50% test) differs from the test used for CGT for gifts holdover and entrepreneurs’ relief where the business has to be ‘substantially trading’. The latter generally involves an 80:20 split of trading vs investment, again with several indicators to look at including assets, income, expenses, time spent by employees and the history of the business.

The OTS comment that the differences between the CGT and IHT rules can distort behaviour and conclude ‘government should consider why the level of trading activity for BPR is set so much lower than the comparable reliefs for CGT. Aligning the BPR trading test with the tests for gift holdover and entrepreneurs’ relief would be a simplification. Having one test would be easier for taxpayers to understand and would reduce distortions to decision making’. Given these comments it may be that, at some point in the future, the rules to qualify for BPR will be tightened up such that it will become more difficult for hybrid companies to meet the rules resulting in a potential loss of BPR.

In light of these potential changes, it is all the more important for businesses with a mix of trading and investment activities to keep their operations under review to ensure that BPR is not inadvertently lost.

Planning for BPR in Privately Owned Businesses – examples

The following examples illustrate pitfalls to avoid in relation to BPR.

1. All or nothing relief
Windermere Ltd, an unquoted company, has 60% investment and 40% trading activities. The company’s shares would not be eligible for BPR as the business consists ‘mainly or wholly’ of holding investments.

Restructuring the company such that it is not ‘wholly or mainly’ an investment company should be considered to meet the BPR rules. This could be achieved with appropriate specialist tax advice by reorganising matters such that a new company, with identical shareholders, held all the investments leaving the existing company just with the trade.

2. Director’s loan account
Dwayne is a director/shareholder in Grasmere Ltd, a trading company. He has owned 50% of the issued share capital for the past ten years. The company owes Dwayne £100,000 which is held in his director’s loan account. Dwayne’s shares qualify for BPR on either a lifetime or death transfer. However, his director’s loan does not qualify for BPR.

In this situation converting the debt into share capital may enable BPR to be secured. If this is done by an ordinary share subscription, then Dwayne would need to hold the shares for a two-year period before they would qualify for BPR.

The alternative approach of a rights issue with the loan account being used to take up the rights issue is generally the preferred route. This is because the shares acquired under a rights issue are identified with the existing shareholding such that the two-year time period for ownership is met straight away. Care needs to be taken that all the legal formalities concerning a rights issue are met.

An alternative is for Dwayne to have his loan account repaid by Grasmere Ltd and for him to personally invest into assets which will qualify for BPR after a two-year period. This might be a portfolio of AIM shares or shares in another unquoted trading company.

3. Excepted assets
Derwentwater Ltd is an unquoted trading company. Kim, a widow, dies having owned 100% of the ordinary share capital of the company for over 20 years.

Under Kim’s will all her assets pass in equal shares to her two children. The probate value of the shares in Derwentwater Ltd is £1m which includes surplus cash not required in the business of £150,000. The executors, of Kim’s will, are satisfied that Derwentwater Ltd is not wholly or mainly an investment company and that BPR is due as follows:

Portion of value Rate
Probate value of shares in Derwentwater Ltd – £1,000,000
Less: value of excepted assets – (£150,000)
Value of shares qualifying for BPR – £850,000

The excepted assets valued at £150,000 are subject to IHT.

In this scenario a regular review of assets held in Derwentwater Ltd would have identified the excepted assets and action could have been taken to change matters to potentially secure more BPR.

4. Business premises owned personally and used by the family company
Emma owns a warehouse used by Ullswater Ltd, a trading company selling chocolates. Emma has a 65% shareholding in Ullswater Ltd and Charlotte has a 35% shareholding (not a family member). Emma gifts 20% of company shares to her son, David, who works in the business as part of the family’s long term IHT and income tax planning.

The gift of the shares does not give rise to CGT due to the availability of hold over relief and future dividends received by David will be taxed at a lower rate than in Emma’s hands. BPR applies so there is no IHT charge if Emma does not survive seven years from the date of gift (provided David still holds the shares at the date of death and assuming that the shares are not subject to a binding contract for sale and still qualify for BPR at the time).

However, in this scenario Emma loses control of Ullswater Ltd as her shareholding reduces to 45%. BPR is available on her shareholding but, having lost control of Ullswater Ltd, the warehouse no longer qualifies for BPR. This pitfall would have been avoided if Emma had gifted fewer shares (14%) and retained control of Ullswater Ltd.


BPR is an extremely valuable IHT relief in relation to both lifetime gifts and on death. It should not be taken for granted that BPR is simply available for shares in privately owned businesses as there are strict conditions for relief.

Full BPR can be lost because of a technicality. Regular reviews of the business profile should be undertaken so that BPR can be preserved or enhanced based on changing circumstances.

Planning early and taking specialist tax advice in advance will give the best results and ensure that hard earned wealth is protected from IHT.

For further advice on maximising BPR, please contact your usual Campbell Dallas advisor or:

Campbell Dallas staff portraits. Katy Burke.

Katy Burke
Tax Associate Director
0141 886 6644

The information in this blog should not be regarded as financial advice. This is based on our understanding in December 2019. Laws and tax rules may change in the future.