Business Relief – could this help reduce your Inheritance Tax liability?

Inheritance Tax (IHT) remains a significant concern for individuals and families, particularly as rising asset values (especially in property) bring more estates above the tax thresholds. Business Relief (BR), a longstanding yet often underutilised relief, offers a potentially effective means of reducing or even eliminating an IHT liability on certain assets. This can form an integral part of a broader estate planning strategy.

Understanding Inheritance Tax

Inheritance Tax is charged at a rate of 40% on the value of an estate that exceeds the available nil-rate bands. For the 2025/26 tax year, the standard nil-rate band is £325,000 per person. In addition, individuals may also benefit from the residential nil-rate band of £175,000 when passing on the family home to direct descendants.

Any value above the combined threshold is typically subject to IHT, although various exemptions and reliefs (including Business Relief) may reduce the overall liability.

What is Business Relief?

Business Relief (formerly Business Property Relief) was introduced to ensure that family businesses could be passed down through generations without being broken up to pay an IHT bill. It allows qualifying assets to be passed on with either 100% or 50% relief from IHT, provided certain conditions are met.

This relief applies to both lifetime transfers and assets held at the time of death, provided the qualifying assets have been owned for at least two years.

What qualifies for Business Relief?

To be eligible for Business Relief, the asset must be part of a qualifying trading business and not primarily involved in investment activities, such as property letting, dealing in shares or securities, or holding investments.

How Business Relief is used in practice

Business Relief is most commonly used in two scenarios:

1. Business Ownership

For business owners, BR allows the value of a trading business to be passed on with minimal or no IHT liability. Provided the ownership requirements and business qualifications are met, the deceased’s interest may benefit from up to 100% relief from IHT. This can prevent the forced sale of a business simply to cover an IHT bill - a key concern for many family-run enterprises.

2. Investment in Business Relief Qualifying Assets

Individuals can also invest in BR qualifying companies either directly or via specialist IHT portfolios. After being held for two years (and provided the investment still qualifies at the time of death) the value of those shares can be fully or partly exempt from IHT. This route appeals to clients who wish to reduce IHT exposure while retaining control and access to capital - something not possible through outright gifts or trust arrangements.

Advantages of Business Relief

Business Relief offers several unique benefits compared to traditional estate planning tools:

• Faster qualification. Relief applies after just two years of ownership, compared to the seven-year rule for gifts - potentially exempt transfers (PETs).
• Retention of ownership. Individuals do not need to give away or relinquish control of assets.
• Flexibility. Unlike trusts, BR does not require complex legal structures and can be adjusted more easily.
• Complementary planning tools. BR can work alongside other tax mitigation strategies such as gifting, trusts, or life assurance.

Risks and key considerations

Whilst Business Relief can be highly effective, it is not without risks or complexities:

• Investment risk - shares in unlisted or AIM-listed companies may be volatile, illiquid, and more prone to failure than mainstream investments.
• Qualifying criteria - not all businesses or assets qualify. HMRC may deny relief if the company’s activities are deemed to be investment-led or passive in nature.
• Legislative risk - Business Relief may be subject to future changes in tax policy. Its availability is not guaranteed indefinitely (AIM recently reduced to 50% relief).
• Ongoing eligibility - qualifying status must be maintained. If a company ceases to trade or changes its activity profile, the relief may be lost.

Professional advice is essential when incorporating BR into an estate plan, particularly in assessing the suitability of investments or business assets.

The role of the Financial Adviser

A qualified financial adviser can provide critical guidance in:

• Assessing your estate’s IHT exposure
• Identifying BR-qualifying assets or investment opportunities
• Integrating BR into a broader estate and succession plan

Working in collaboration with tax and legal professionals, your adviser can also help ensure that all aspects of your estate plan are aligned and robustly structured.

Summary

Business Relief remains a valuable and flexible tool for reducing inheritance tax. Whether through direct business ownership or carefully selected investments, BR allows individuals to potentially mitigate IHT while retaining control over their assets. That said, the rules surrounding qualification can be complex, and the potential risks must be fully understood. Engaging with a professional adviser early can help you structure your estate in a way that maximises available reliefs, protects your legacy, and ensures your wealth passes on according to your wishes and not lost unnecessarily to taxation.

To determine whether Business Relief could form part of a suitable solution for your estate, speak to your financial adviser. Tailored advice is essential to navigate the complexities and make informed, strategic decisions.

Although every effort has been made to ensure that the information provided in this article is accurate and correct, the information provided does not constitute any form of financial advice. We recommend that you take financial advice before making any financial decisions.