Business property relief (BPR) - and agricultural property relief (APR), together APR/BPR - were very valuable exemptions from UK inheritance tax (IHT). It was announced in Budget 2024 that BPR/APR will be reformed from 6 April 2026 and the 100% rate of relief for qualifying business and agricultural assets will be available for the first £1m of combined agricultural and business property but will be reduced to 50% thereafter. Laura Cullinane, Private Client & Tax Senior Associate at Boodle Hatfield shares her thoughts.
This relief has meant that many businesses (and farms) were not taxed on death but now business owners may be considering planning opportunities such as making outright lifetime gifts to the next generation and to transfer shares into trust during lifetime.
The Government announced that it would publish a technical consultation in early 2025 .
Given the discussions around changes to BPR, this article comments on the impact of proposed changes to BPR on family businesses and briefly considers similar reliefs in some other jurisdictions.
Background To The Budget 2024 And Proposed Changes
To put Budget 2024 into context, various changes or conditions to restrict reliefs, including BPR/APR, had been considered in an OTS report and an All Party Parliamentary Group report (among others). In 2021, a report was published on how other OECD countries approach inheritance/estate tax and noted equivalent reliefs for family businesses .
The effective reduction of the rate of relief announced in the Budget will mean business owners may have an IHT exposure which may not necessarily have been considered or reviewed in any detail. This will have a huge impact on family businesses, which may have otherwise relied on BPR at a rate of 100%, to pass businesses to the next generation.
These businesses might have to raise sufficient liquid funds to settle the IHT charge on the death of the shareholder (and this may occur on the transition to every new generation if it is not practical to make lifetime gifts). The instalment option is often cited to assist with payment of IHT which can justify an upfront tax charge but will not necessarily soften the blow for family businesses where there is insufficient liquidity – or reserves – to pay the tax and could have an impact on cash flow and future profits of the business.
How Are Other Jurisdictions Approaching The Relief?
This relief is not specific to the UK and there are existing reliefs in other jurisdictions to allow for the continuation of entrepreneurship and family businesses.
Like BPR/APR these reliefs have conditions to target the relief and to genuinely support business continuity particularly across different generations of the family . These include:
Generally, allowing a full or partial exemption for business assets, or offering lower tax rates, preferential valuation rules and deferrals. In Germany, businesses choose between a full or partial exemption and taxpayers can choose between the two exemptions (which have slightly different conditions).
Requiring the business to pass to the heirs by having minimum ownership periods and/or control requirements. It should be noted that in many other jurisdictions, tax may be paid by the heirs (and not by the estate which is the case in the United Kingdom). In countries including Belgium, Germany, Ireland and Italy, conditions include requiring heirs to hold the business for minimum ownership period following a transfer/succession event. This is similar to a condition for BPR in the UK whereby shares or the interest in the business must be held for a two-year minimum ownership period for BPR to apply. During this time, heirs continue to be involved in the business, which may constitute carrying out paid work and/or being a member of the managerial team.
In Italy for example, there is an 100% exemption from inheritance and gift taxes in the case of business transfers to the spouse and/or descendants, provided that the beneficiary continues the business activity for at least five years following the transfer.
Some countries have conditions as to how the business is run - requiring businesses to maintain a share of the wage bill (e.g. Germany), a number of employees or assets invested in the company.
In the UK, the business must be trading for BPR to apply i.e. not wholly or mainly of holding investments. Similarly, other jurisdictions do not allow relief for investment businesses such as in Belgium, Ireland and the Netherlands.
The design of tax relief can affect behaviour. In the UK, the recent announcements may prompt earlier conversations about the governance of family businesses and how they may involve the next generation to ensure they have a role to play on a business transition event. If ownership of a family business is fragmented as a result of a transition event, then fragmentation of shareholdings can result in discounted valuation, which in turn can reduce values for the purpose of calculating the tax.
Conclusion
In light of the UK Government overhaul to BPR/APR from 6 April 2026 and the pending consultation, the reduction of the relief will mean that there is an IHT exposure that will need to be considered – and budgeted for.
This will have a real impact on family business (and farming) operations which could struggle to raise liquid funds to pay an IHT charge. Considering the above, now is a good time for business owners to be looking at their businesses and forming a succession plan and to consider planning opportunities.
About the Author - Laura Cullinane is a Private Client and Tax Associate at Boodle Hatfield. Find out more about the work they undertake with family businesses by visiting their website here
%20copy%20(4)%20copy-Medium-Quality%20(1).jpg)
.png){kind=logo}
