Inheritance Tax on a Business UK: How BPR Works for Sole Traders, Partnerships, and Companies (2026)
Qualifying business assets can be 100% IHT-free via Business Property Relief (BPR — ss103-114 IHTA 1984) after 2 years' ownership. From April 2026, the 100% relief is capped at £1m combined BPR/APR — a £2m business now faces ~£200,000 IHT above the cap. The trading test, excepted assets, and the new cap fundamentally affect succession planning for business owners.
| Business Interest Type | BPR Rate | IHTA Section | Effective IHT Rate | Key Condition |
|---|---|---|---|---|
| Sole trader business (trading) | 100% | s105(1)(a) | 0% (up to £1m cap) | 2yr ownership; trading test; no excepted assets |
| Partnership interest (trading) | 100% | s105(1)(a) | 0% (up to £1m cap) | 2yr; trading test; LLP included |
| Unquoted company shares (trading, incl. AIM) | 100% | s105(1)(bb) | 0% (up to £1m cap) | 2yr; trading test; AIM treated as unquoted |
| Listed company shares — controlling interest (>50%) | 50% | s105(1)(cc) | 20% | 2yr; must be controlling; no cap limit for 50% BPR |
| Land used in the owner's partnership/company (owned personally) | 50% | s105(1)(d)/(e) | 20% | Used in business; 2yr; owned personally not via co. |
| BPR above £1m combined BPR/APR cap (from April 2026) | 50% | s105 (cap — Budget 2024) | 20% on excess above £1m | Cap applies per estate; BPR + APR combined |
| Investment company (primarily holding investments) | 0% (fails trading test) | s105(3) | 40% | Wholly/mainly investment = no BPR |
| AIM shares — non-qualifying (investment company) | 0% | s105(3) fails | 40% | AIM is treated as unquoted BUT trading test still applies |
2026/27 — April 2026 cap in force. Combined BPR/APR: £1m at 100%; 50% above. Effective IHT above cap: 50% × 40% = 20% effective rate. Trading test (s105(3) IHTA 1984): not wholly or mainly making or holding investments. Excepted assets (s112 IHTA 1984): deducted before BPR value calculation. 2yr ownership (s106 IHTA 1984).
IHT on a Business: Complete Guide
How BPR works — the business's most important IHT protection
Business Property Relief (BPR — ss103-114 IHTA 1984) is the inheritance tax relief that protects qualifying business assets from IHT. When BPR applies, the value of the business interest is reduced by the relief percentage before IHT is calculated. 100% BPR means the full value of the business is eliminated for IHT — no IHT is payable on the business. 50% BPR means half the business value is eliminated for IHT — effectively a 20% IHT rate on the business value. BPR applies on death (where the business owner leaves the business in the will or it passes under intestacy) and on lifetime gifts into trusts (CLTs). For PETs (gifts to individuals): BPR does not apply at the time of the gift, but if the donor dies within 7 years, BPR may apply to reduce the IHT on the failed PET — provided the donee still owns qualifying business property at the date of the donor's death. This is called 'replacement property' BPR (s107 IHTA). BPR is self-assessed — the estate claims it on the IHT400; HMRC may enquire into the claim and challenge the trading test or excepted asset calculations. Many BPR claims are settled after negotiation.
Sole trader businesses — 100% BPR on the whole business
A sole trader carrying on a qualifying trading business qualifies for 100% BPR on the value of the business interest (s105(1)(a) IHTA 1984). The 'business' includes all assets used in the trade: the trading premises (if owned by the sole trader), goodwill, stock, work in progress, debtors, and equipment. Deduction from BPR value: any excepted assets (s112 IHTA) — assets held by the business but not used or required for the purposes of the business — are excluded from BPR. Example excepted assets for a sole trader: (a) A large cash reserve significantly exceeding what is required for the business's working capital needs; (b) An investment portfolio held by the business but not required for the trade; (c) A property held by the business as an investment (not used in the trade). The sole trader must have owned and operated the business for at least 2 years before the transfer (s106 IHTA). If the business was acquired less than 2 years before death: BPR does not apply (unless the business replaced another qualifying business — replacement property rule — s107 IHTA). The 2-year ownership clock resets if the business structure changes significantly — converting from sole trader to limited company, for example.
Limited company shares — 100% BPR for unquoted companies
Shares in an unquoted company (a company not listed on any recognised stock exchange) qualify for 100% BPR under s105(1)(bb) IHTA 1984, provided: (1) The company carries on a qualifying business (the trading test — s105(3) IHTA: the company must not be wholly or mainly making or holding investments); (2) The shareholding has been owned for at least 2 years (s106 IHTA); (3) The shares do not consist of excepted assets (s112 IHTA) in proportion to the total. AIM shares: companies listed on AIM (Alternative Investment Market) are treated as unquoted for BPR purposes — AIM is not a 'recognised stock exchange'. AIM shares in qualifying trading companies therefore qualify for 100% BPR after 2 years. Controlling interest in a listed company: a shareholding of more than 50% in a listed (fully quoted) company qualifies for 50% BPR (s105(1)(cc) IHTA). Non-controlling listed company shares: no BPR at all. Property investment company: a company that primarily holds investment properties fails the trading test — the shares receive no BPR. This is one of the most common BPR disputes with HMRC: mixed trading and investment companies where the business activity level is contested.
Partnership interests — 100% BPR and the 50% land rule
A partnership interest in a trading partnership qualifies for 100% BPR on the value of the partner's share in the business (s105(1)(a) IHTA 1984). This includes the partner's share of goodwill, stock, debtors, and business assets held in the partnership. The 2-year ownership and trading test conditions apply in the same way as for sole traders and company shares. Land, buildings, and machinery owned by the partner personally (not by the partnership) but used by the partnership: this commonly occurs where the business premises are owned by one partner personally but occupied by the partnership. This type of property qualifies for 50% BPR under s105(1)(d) IHTA 1984 — reducing the IHT on the business property from 40% to 20%. The 50% relief only applies if the individual partner owns the property in their own name (not through the partnership). Where the partnership owns the land, 100% BPR applies to the partnership interest (which includes the land). LLP interests: Limited Liability Partnership (LLP) interests are treated as partnership interests for BPR. The partner/member's share of the LLP qualifies for 100% BPR on the same conditions as a general partnership interest.
The April 2026 BPR cap — £1,000,000 combined BPR/APR at 100%
From April 2026 (announced in the Autumn Budget 2024), a combined cap of £1,000,000 applies to the amount of Business Property Relief (BPR) and Agricultural Property Relief (APR) that can attract the full 100% relief rate. Business assets above £1,000,000 in value will only attract 50% BPR (rather than 100%) — equivalent to a 20% effective IHT rate on the excess. Impact examples: (1) A sole trader business worth £800,000: fully below the £1m cap — 100% BPR, £0 IHT; (2) A £2,000,000 family company: first £1,000,000 at 100% BPR (£0 IHT); excess £1,000,000 at 50% BPR — £500,000 taxable at 40% = £200,000 IHT; (3) A farming business with APR and BPR combined at £2,500,000: first £1,000,000 at 100% relief (£0); excess £1,500,000 at 50% relief — £750,000 taxable at 40% = £300,000 IHT. The £1m cap applies on a per-estate basis, not per-business or per-transfer. It combines BPR and APR — a family that owns both a business and a farm faces a single £1m cap across both. This change fundamentally affects business succession planning for larger businesses. Pre-planning before April 2026 (where achievable) and trust planning (e.g., placing business interests into a discretionary trust during lifetime to start the 10-year clock before the cap applies) should be considered.
Frequently Asked Questions
Do you pay inheritance tax on a business?
Not automatically — qualifying business interests attract Business Property Relief (BPR — ss103-114 IHTA 1984) which reduces or eliminates IHT. 100% BPR (no IHT): sole trader businesses, partnership interests, and unquoted company shares (including AIM shares) in qualifying trading companies after 2 years' ownership. 50% BPR (20% effective IHT rate): controlling interests in listed companies, and land/buildings used in the owner's partnership or company (owned personally). From April 2026: combined BPR/APR cap of £1m at 100%; 50% above the cap. A £2m qualifying business now faces ~£200,000 IHT above the £1m cap.
What is Business Property Relief for inheritance tax?
Business Property Relief (BPR — ss103-114 IHTA 1984) reduces the value of qualifying business interests for IHT. 100% BPR eliminates IHT on the business; 50% BPR halves the taxable value (20% effective IHT rate). Conditions: (1) Qualifying business type — not wholly/mainly investment; (2) 2+ years' ownership (s106 IHTA); (3) No excepted assets (s112 — surplus cash/investments not used in the business). From April 2026: £1m combined BPR/APR cap at 100%; 50% above.
Does a limited company qualify for Business Property Relief?
Shares in an unquoted company (not listed on a recognised stock exchange) qualify for 100% BPR (s105(1)(bb) IHTA 1984) if the company passes the trading test (not wholly/mainly investment — s105(3) IHTA) and the shares have been owned for 2+ years. AIM shares: treated as unquoted — 100% BPR after 2 years on qualifying trading companies. Listed (fully quoted) company shares: no BPR unless it is a controlling interest (>50%) = 50% BPR. Investment companies (primarily holding investment properties): no BPR — fails the trading test. From April 2026: £1m combined BPR/APR cap at 100%.
What is the 2-year ownership rule for Business Property Relief?
The business interest must have been owned continuously for at least 2 years immediately before the transfer (death or gift — s106 IHTA 1984). If the business was acquired less than 2 years before death, BPR does not apply — unless the business replaced another qualifying business interest (replacement property rule — s107 IHTA). The 2-year clock may reset on significant business restructuring (e.g., conversion from sole trader to limited company, though HMRC guidance and case law on this is nuanced). Inherited business: where business property is inherited from a spouse, the deceased spouse's ownership period is added to the survivor's period for the 2-year test.
How does the April 2026 BPR cap affect business owners?
From April 2026, 100% BPR is capped at £1,000,000 combined BPR/APR per estate. Business value above £1m receives only 50% BPR (effective 20% IHT rate on the excess). A £2m qualifying business previously paying £0 IHT now pays ~£200,000 (£1m × 50% BPR × 40% IHT rate). Planning options: business succession before April 2026 where achievable; lifetime gifts of business interest (CLT — IHT holdover relief available on CLTs under s260 TCGA); business protection life insurance in trust to fund the IHT on excess above the cap; shareholder/partnership buy/sell agreements; employee ownership trust (EOT — separate IHT treatment).
Protect the Business — Update the Will and Succession Plan
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