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Potential changes to Business Property Relief

View profile for Jessica Newton
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Potential changes to Business Property Relief

In 2019, the Office of Tax Simplification (“OTS”) carried out a review of UK Inheritance Tax (“IHT”) as set out in Katie Gibson-Green’s blog “Proposed changes to IHT and how that affects farmers”. 

One of the main areas considered during this review was the availability of Business Property Relief (“BPR”) which can prove to be an extremely valuable relief from IHT for farmers. 

The current Business Property Relief regime 

At present, BPR is available at the rate of either 100% relief or 50% relief on “relevant business property”, which includes:

  • A business or an interest in a business, including a partnership (100%)
  • Shares in an unlisted company (100%)
  • Shares listed on the Alternative Investment Market (“AIM”) (100%)
  • Quoted shares or securities where the owner has a controlling interest (50%)
  • Land, buildings or machinery owned personally and used in the individual’s partnership or a company which they control (50%)

Additionally, in order to qualify for BPR, the business in question must not consist “wholly or mainly” of the following prohibited activities:

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

Whilst legislation does not define the “wholly or mainly” test, case law has established this to be a 50% or more test. Therefore, as long as the investment part of a business does not account for more than 50% of the business as a whole, BPR may still be available.

BPR also normally only applies where the asset in question has been held for at least two years, though there are relaxations of this rule in specific circumstances.

BPR is particularly important for farmers as it is often able to provide relief from IHT for aspects of the farming business for which Agricultural Property Relief (“APR”) is not available or does not cover the full value of the asset. 

APR is only available on the “agricultural value” of the asset and not the full market value which may be higher. For example, on the farmhouse, BPR may be available on the remainder of the value over and above the agricultural value.

Potential changes in light of the OTS review

The OTS review highlighted the differences between BPR on IHT and similar reliefs from Capital Gains Tax (“CGT”). In particular, it compared the “wholly or mainly” test for BPR, which is a 50% test to the “substantially trading” test for CGT which is generally accepted as a minimum of 80% test and, accordingly, is far stricter. 

The OTS stated that “aligning the BPR trading test with the tests for gift holdover and entrepreneurs’ relief would be a simplification. Having one test would be easier for taxpayers to understand and would reduce distortions to decision making.”

This may mean the rules on qualification for BPR become stricter, making it more difficult for certain types of business to meet the tighter rules, which might mean BPR is no longer available to them. This may be of concern to farmers and rural business owners who have sought to diversify their business in recent years or who are considering doing so in the future.

There have, however, been proposals to scrap both APR and BPR altogether, so the OTS’ proposals to align BPR with the tests for holdover relief and entrepreneurs’ relief may be the lesser of two evils.

If you need assistance with tax planning, please contact our specialist Agriculture and Estates team.

I am based in our Colchester office and can be contacted on 01206 217312 or