Business Property Relief

The 2024 Autumn Budget, presented by Chancellor Rachel Reeves, proposed significant changes to Business Property Relief (BPR), impacting future Inheritance Tax (IHT) planning. Here’s a breakdown of what BPR is, what the changes entail, and what steps you might consider as a business owner or investor.

What is Business Property Relief?

Business Property Relief (BPR) is an IHT relief that can reduce the tax due on transfers of certain business assets, with relief rates of either 100% or 50% depending on the asset type.

100% BPR applies to:

• An entire business or an interest in a business.
• Unquoted shares in a company.

50% BPR applies to:

• Controlling shares in quoted companies. Land, buildings, machinery, or plants used in a business controlled by the individual or in partnerships.
• Similar assets used under a life interest by a beneficiary in the business.
• To qualify, assets typically must be held for at least two years, and certain restrictions apply (e.g. assets used solely for investment purposes don’t qualify).

Key Changes to BPR in the 2024 Autumn Budget

The new proposals, expected to take effect on 6th April 2026, bring notable changes to BPR.

The main updates include:

• Introduction of a £1 Million BPR Allowance, 100% BPR will now only apply to assets valued up to £1 million, shared with any assets qualifying for Agricultural Property Relief (APR).
• For estates exceeding the £1 million threshold, the BPR rate will drop to 50%.
• The £1m allowance applies to an individual so married couples/civil partners have £1m each. So joint ownership is a key step. The allowance is lost on death if not used (unlike the IHT nil rate band).

Impact on AIM Shares

AIM-listed shares, traditionally eligible for 100% BPR, will now qualify for only 50% relief, regardless of value. This reduction applies independently of the new £1 million.

Application to Various Transfers

• For individuals, the £1 million allowance covers: Property within an estate at death.
• Lifetime transfers made within seven years of death (failed PETs).
• Lifetime transfers to trusts that trigger an immediate charge.

For trusts:

• From 6 April 2026, each trust will have a £1 million allowance for assets qualifying for 100% relief on each tenth-anniversary charge or exit charge.
• Trusts established before 30 October 2024 will retain this £1 million allowance individually, but trusts set up after this date must share it if created by the same individual.

How to Prepare for These Changes

With these proposed changes, business owners and investors may want to take action to reassess their IHT planning strategy. Here are some steps you might consider:

Assess Potential IHT Exposure

Estimate any IHT liabilities from April 2026 onward, especially if your business assets exceed the £1 million threshold. Review how assets will be distributed under your Will and consider whether some provisions may need updating for tax efficiency.

Review Your Will

Consider revisiting your Will, especially regarding BPR and APR-qualifying assets. Unlike the Nil Rate Band, the £1 million BPR allowance isn’t transferable between spouses. Each partner should own a share of qualifying assets to maximise both allowances.

Plan for Liquidity

Consider whether you’ll have enough liquid assets to cover any IHT liability.

Think About Lifetime Giving

The new rules will apply to gifts from 30 October 2024 if the donor passes away on or after 6 April 2026.

Carefully structured lifetime gifts could help reduce IHT exposure but come with conditions. Considering gifts must be survived by seven years to avoid IHT implications, and gifts with a retained benefit might not qualify.

Consider Trusts Cautiously

While trusts remain useful for asset protection and tax planning, be mindful of the potential IHT events related to trusts, including charges on creation, every ten years, and upon asset transfer out of the trust.

The proposed changes to BPR could affect business owners and investors with significant business or agricultural property. While the changes are not yet law and are subject to consultation, it is a good opportunity to review your estate and IHT planning strategies.