Business Relief and Inheritance Tax: A Guide for Business Owners

Business Relief (also referred to as Business Property Relief, or BPR) is an Inheritance Tax (IHT) relief that reduces the taxable value of qualifying business assets by either 100% or 50%, whether those assets are passed on during your lifetime or on death.

For many business owners, Business Relief has historically meant that the full value of a trading business could pass to the next generation free of IHT. The 2024 Autumn Budget introduced reforms that took effect on 6 April 2026, capping the 100% rate and changing the treatment of Alternative Investment Market (AIM) shares.

We explain how the relief works under the current rules, what changed, and what you can do to protect your position in the following guide.

This guide contains general information only. It does not constitute tax or legal advice. You should take advice on your specific circumstances before making any decisions about your estate or business structure.

Why Business Relief matters for business owners

Without Business Relief, your business would form part of your estate at full market value when you die. IHT is charged at 40% on the value of your estate above the nil-rate band (currently £325,000), and potentially above the residence nil-rate band (currently £175,000 for qualifying estates). A profitable trading business can produce a substantial IHT liability.

If your family can’t meet that bill from other assets, they may have little choice but to sell or break up the business to fund the tax. Business Relief was introduced precisely to prevent that outcome and to keep viable businesses intact across generations. The 2024 Budget changes have reduced the scope of that protection for larger businesses, which is why planning is more important now than it has ever been.

The 2024 Autumn Budget changes: what changed on 6 April 2026

The Autumn Budget 2024 introduced two significant reforms to Business Relief, both taking effect on 6 April 2026.

A cap on the 100% rate

Before 6 April 2026, the 100% rate of Business Relief applied without any upper limit. A business of any value could pass free of IHT, provided all qualifying conditions were met. Initially, the budget announced a cap of £1 million but, from 6 April 2026, the 100% rate is capped at £2.5 million per person. This is applied across the combined value of Business Relief and Agricultural Property Relief (APR) assets. Amounts above the cap attract 50% relief, giving an effective IHT rate of 20% on the excess.

Where a person dies with an unused allowance, their surviving spouse or civil partner can inherit that allowance, potentially raising a couple’s combined cap to £5 million. Your solicitor or tax adviser can confirm how this applies to your specific estate.

AIM shares now attract 50% relief

Shares traded on the Alternative Investment Market (and similar markets) previously attracted 100% Business Relief because they were treated as unquoted for IHT purposes. From 6 April 2026, AIM shares attract only 50% relief regardless of how long they’ve been held, giving an effective IHT rate of 20% on their value.

Anti-forestalling provisions

Anti-forestalling rules apply to certain lifetime gifts made on or after 30 October 2024. These provisions were introduced to restrict planning strategies designed to take advantage of the pre-6 April 2026 rules before the new cap took effect. If you made gifts into a Trust or to individuals between 30 October 2024 and 5 April 2026, you should take specific advice on how those transfers are treated.

Trust treatment

The rules governing how Business Relief interacts with Trusts are also changing. If business assets are held in a Trust, or you’re considering placing them into one, take specific advice on how the new regime applies to your arrangements.

How Business Relief works: the 100% and 50% rates

Business Relief is claimed against “relevant business property” as defined in section 105 of the Inheritance Tax Act 1984.

Assets attracting 100% relief (subject to the £2.5 million cap)

• A sole trader’s business or interest in a business, such as a partnership share.
• Shares in an unquoted (private) company.

Assets attracting 50% relief

• AIM-listed shares, from 6 April 2026.
• Shares giving the deceased control of a fully listed (quoted) company.
• Land, buildings, machinery or plant owned by the deceased and used wholly or mainly for the purposes of a partnership in which they were a partner, or a company they controlled.

Qualifying conditions: the tests your business must meet

To claim Business Relief, these statutory conditions must all be satisfied:

1. The two-year ownership rule. The asset must generally have been owned by you for at least two years immediately before the transfer. Exceptions apply where you replaced one qualifying business asset with another within those two years, or where the asset was inherited from a spouse or civil partner, whose period of ownership counts towards the two years.
2. Relevant business property. The asset must fall within one of the categories defined in section 105 of the Inheritance Tax Act 1984.
3. Not an excluded business. The business must not be wholly or mainly carrying on excluded activities. See below for what falls outside the relief.
4. No binding contract for sale. The asset must not be subject to a binding contract for sale at the date of transfer. There is an important exception for cross-option agreements, explained in the next section.
5. A going concern. The business must not be in liquidation or in the process of winding up at the date of transfer.

What does not qualify: excluded businesses and excepted assets

Excluded businesses

Business Relief does not apply to businesses that are wholly or mainly engaged in:

• Dealing in securities, stocks or shares.
• Dealing in land or buildings.
• Making or holding investments.

In practice, this rules out most property letting businesses, including residential buy-to-let and commercial property lettings. Many serviced accommodation and holiday let businesses also fall outside the relief, because HMRC treats them as primarily investment activity in nature.

Case law, including decisions in Pawson v HMRC and Ross v HMRC, sets a demanding standard for establishing active trading. The test applies to the business as a whole: if investment activity predominates, the entire business is excluded.

Excepted assets

Even where a business qualifies for Business Relief, individual assets within it may not. Under section 112 of the Inheritance Tax Act 1984, “excepted assets” are stripped out of the relief calculation. An asset is treated as excepted if it wasn’t used wholly or mainly for the purposes of the business throughout the two years before transfer, or if it isn’t required for future business use.

Common examples include:

• Surplus cash on the balance sheet not demonstrably needed for trading.
• An investment property held inside a trading company.
• A director’s personal loan account owed by the company.
• Assets used primarily for the personal benefit of a director or shareholder.

HMRC frequently challenges Business Relief claims on excepted assets grounds. Maintaining clear, contemporaneous evidence that cash reserves and other assets are retained for genuine trading purposes is an important safeguard.

Business Relief and AIM shares

AIM shares attracted 100% Business Relief for many years because they were treated as unquoted for IHT purposes, despite being traded on a recognised exchange. Holding an AIM portfolio for at least two years could, in principle, remove its full value from your IHT estate. This made AIM investment a widely used planning strategy.

From 6 April 2026, AIM shares attract only 50% Business Relief, giving an effective IHT rate of 20% on their value. There is no grandfathering for existing holdings, and the change applies regardless of how long the shares have been held.

If you hold AIM shares as part of an IHT planning strategy, you should review your position with both your investment adviser and your solicitor. The tax advantage available has reduced substantially, and the overall suitability of the approach needs reassessing in light of the current rules.

Business Relief and shareholders’ agreements: the cross-option trap

If your business has a shareholders’ agreement, its precise structure can directly affect Business Relief.

A buy-and-sell agreement, under which one party is bound to sell their shares on death and the other is bound to buy, creates a binding contract for sale. HMRC treats this as meaning the shares carry a cash value rather than a business value on death, which removes Business Relief. This is the long-established position set out in HMRC’s Inheritance Tax Manual.

A cross-option agreement (also called a double-option agreement) achieves a similar commercial result without creating a binding obligation. Under this structure, the deceased’s personal representatives hold an option to sell, and the surviving shareholders hold a separate option to buy, but neither side is required to exercise their option. Therefore, as no binding obligation arises on death, Business Relief is preserved.

If you have a shareholders’ agreement in place, or are considering one, it should be reviewed with both the commercial and the IHT implications in mind. The structural difference between a buy-and-sell and a cross-option agreement is subtle, but the tax consequences are significant. Our corporate and commercial solicitors can review or draft a cross-option agreement alongside your estate planning.

Lifetime gifts of business assets and Business Relief

Business Relief isn’t limited to transfers on death. It can also apply to lifetime transfers, including potentially exempt transfers (PETs) to individuals and chargeable lifetime transfers (CLTs) into a Trust.

However, relief on a lifetime gift can be lost if the donee no longer holds qualifying business property at the date of the donor’s death, or the donee’s earlier death. This is the clawback rule. If you give away shares in a trading company and the company changes its activities before you die, the relief on the original gift may not be available and the transfer could become taxable.

The anti-forestalling rules from the 2024 Autumn Budget restrict certain planning strategies involving gifts made between 30 October 2024 and 5 April 2026. If any transfers were made in that window, their tax treatment should be reviewed.

For owners whose businesses are worth significantly more than the £2.5 million cap, lifetime planning using both spouses’ allowances and the seven-year potentially exempt transfer period may still offer useful opportunities. This area is complex and requires coordinated advice from your solicitor and accountant.

How to plan for Business Relief: practical steps

There are several practical steps you can take to protect your position:

• Review your business structure. Ensure trading activities genuinely predominate over any investment activity. Consider whether surplus cash and non-trading assets should be managed separately.
• Review your Will. Ensure your Will is structured so that Business Relief assets pass in a tax-efficient way, and that both you and your spouse or civil partner make full use of your individual allowances.
• Check your shareholders’ agreement. Ensure any buy-and-sell or cross-option provisions are correctly structured to preserve Business Relief.
• Consider life assurance. A whole-of-life policy written in trust can provide funds to meet any IHT liability above the cap without requiring the business to be sold.
• Review any AIM portfolio. If you hold AIM shares for IHT planning, reassess their role in light of the 50% relief cap now in force.
• Document trading activity, board minutes, management accounts, and evidence that cash balances are needed for trading purposes all help resist an HMRC challenge on excepted assets grounds.
• Keep evidence of the two-year ownership period. Share certificates, Companies House filings, and accounting records all support a Business Relief claim.

Above all, start planning early. The most effective strategies take time to implement and require your business structure, Will, and shareholders’ agreement to be considered together.

How Fraser Dawbarns can help

Our solicitors advise business owners, shareholders, and family businesses across Cambridgeshire, Norfolk, and East Anglia on the overlap between corporate, private client, and estate planning matters. We can assist with Wills and estate planning, Inheritance Tax planning, shareholders’ agreements and cross-option arrangements, business succession and restructuring, and probate where Business Relief is in issue. We work alongside your accountant or tax adviser where a coordinated approach is needed.

Fraser Dawbarns is recognised in the Legal 500 for our private client work. We offer clear, practical advice with transparent costs from the outset, and direct access to your solicitor throughout.

Frequently asked questions about Business Relief

What is the difference between Business Relief and Business Property Relief?

They are the same relief. “Business Property Relief” is the term used in the Inheritance Tax Act 1984, covering sections 103 to 114. HMRC and more recent government communications, including the 2024 Autumn Budget documents, increasingly use “Business Relief.” Both abbreviate to BR (or BPR in older usage). The substantive rules are identical.

Will I still get 100% Business Relief after April 2026?

Yes, up to the £2.5 million cap per person. The 100% rate continues to apply to the first £2.5 million of combined Business Relief and Agricultural Property Relief assets. Amounts above that receive 50% relief, giving an effective IHT rate of 20% on the excess. Where a spouse or civil partner has an unused allowance at death, it transfers to the surviving partner, potentially raising the combined cap to £5 million. AIM shares receive only 50% relief regardless of the cap.

Does Business Relief apply to AIM shares?

Under the rules that applied before 6 April 2026, AIM shares held for at least two years generally qualified for 100% Business Relief because they were treated as unquoted for IHT purposes. From 6 April 2026, AIM shares qualify only for 50% relief, regardless of how long they’ve been held. If you hold AIM shares as part of an IHT planning strategy, review your portfolio with coordinated investment and legal advice.

Do I need to have owned the business for two years?

In most cases, yes. The asset must have been owned by you for at least two years immediately before the transfer. Exceptions apply where you replaced one qualifying business asset with another within those two years, or where the asset was inherited from a spouse or civil partner, whose period of ownership counts towards the two years.

Does a buy-and-sell agreement affect Business Relief?

Yes. A binding buy-and-sell agreement, under which one party must sell and the other must buy on death, creates a binding contract for sale. HMRC treats the shares as having a cash value rather than a business value, removing Business Relief. A cross-option agreement, where neither party is bound to act, preserves the relief. If you have a shareholders’ agreement, it’s worth having it reviewed by a solicitor who understands both the commercial and the IHT implications.

Are buy-to-let businesses eligible for Business Relief?

Generally, no. HMRC treats residential letting and most commercial property letting as investment activity, which excludes the business from Business Relief. Businesses involving active hospitality, such as hotels, may qualify in some circumstances, but the case law sets a demanding standard. Take specialist advice if you’re unsure how your business is categorised.

How do I claim Business Relief?

Business Relief is claimed by the personal representatives as part of the Inheritance Tax account when applying for probate. You need to complete Form IHT400 and supplementary schedule IHT413 for business and partnership interests. Supporting evidence, including accounts, a professional valuation, the shareholders’ agreement, and trading history documentation, should be gathered in advance wherever possible.

What is the £2.5 million cap on Business Relief?

From 6 April 2026, the 100% rate of Business Relief is capped at £2.5 million per person, applied across the combined value of Business Relief and Agricultural Property Relief assets. Amounts above the cap receive 50% relief, giving an effective IHT rate of 20% on the excess. Unused allowances from a deceased spouse or civil partner are transferable, potentially raising a couple’s combined cap to £5 million.

Can I gift my business during my lifetime to avoid Inheritance Tax?

Lifetime gifts of qualifying business assets can attract Business Relief and, if you survive seven years from the date of the gift, may fall outside your estate altogether as potentially exempt transfers. However, anti-forestalling rules introduced with the 2024 Autumn Budget restrict certain planning strategies involving gifts made between 30 October 2024 and 5 April 2026.

Relief can also be clawed back if the donor no longer holds qualifying business property when you die. Lifetime gifting is a powerful tool, but it needs careful structuring and should not be approached without specific advice on your circumstances.

Contact our estate planning solicitors today

Don’t hesitate to protect your business’s legacy. You can get in touch with your nearest office in King’s Lynn, Ely, Wisbech, March or Downham Market. Alternatively, complete the enquiry form at the bottom of the contact page, and a lawyer will be in touch.