Inheritance tax is often one of the primary concerns for individuals and families keen to pass on their business to the next generation. Inheritance tax is currently at a rate of 40% and can therefore have a significant impact on the next generation who may be expecting to rely on inheritance from you to support their lifestyle and continue to run the family business.
There are two main reliefs that are available: Business Property Relief (‘BPR’) and Agricultural Property Relief (‘APR’). It is vital that as a business owner you are aware of the reliefs when you are considering how best to pass on your wealth.
What is BPR?
BPR is a relief that will only apply where you have owned the asset or business for at least 2 years prior to your death. You can expect to claim a relief of up to 100% on certain qualifying business assets. However, BPR will not apply to investment businesses and the business must therefore be a trading or services business.
Case Study: considering BPR
Recently, one of our clients was shocked to learn that if he sold his business during his lifetime currently valued at £1 million then this could lead to around £500,000.00 inheritance tax due to be paid from his Estate on his death based on the value of his Estate as a whole.
This then opened up further difficult questions such as which of his assets the inheritance tax would be paid from and how would this impact the beneficiaries of his will. If he opted for the inheritance tax to be paid from the bulk of his Estate, then this would have substantially reduced the amount of inheritance to his partner and children. He had not appreciated that unless his business was being sold to a company that would carry on the business and the Estate would be paid mainly in shares in that company that BPR would be lost.
We discussed the various different options with our client and outlined that if the business was retained and passed on to the children then this would enable his Estate to claim BPR. This was an important consideration to our client, as he had not made a decision as to what he would like to do with his business and given that some of the children were already working for the business it would be sensible to have a full discussion with his children as to whether they would want to continue the business after his death to help him in his decision making.
We discussed that if he did decide to sell his business then he would be best placed to speak with an independent financial advisor.
What is APR?
BPR cannot be claimed on an asset that attracts APR. APR is a relief intended to allow for the passing down of agricultural property to the next generation. It is a complex relief, and it generally applies to land or pasture that is used to grow crops or rear animals. The agricultural property must be part of a ‘working farm,’ in order to qualify for the relief. As with BPR, the property must have been used for agricultural purposes for 2 years prior to death. It is possible to attract up to 100% relief on certain qualifying assets.
Changes to APR and BPR (The Cap)
The October 2024 budget announced key reforms to BPR and APR which are due to take effect from 6 April 2026.
At present up to 100% relief is available on business and agricultural assets. From the 6 April 2026, there will be a cap introduced so that there will only be 100% relief for up to the first £1 million of combined agricultural and business property. Any assets over this amount that qualify for BRP and APR will only be able to apply for 50% relief, which effectively halves the relief available to offset against the Estate.
It is crucial to review your will or make a new will to ensure that you are maximising the allowances that can be claimed against your Estate for inheritance tax planning. The £1 million allowance for APR and BPR is not transferrable between spouses or civil partners which means that you may wish to consider who you would like to benefit from your share of the business on your death to maximise the allowances available.
Summary
Whilst BPR and APR offer valuable reliefs for inheritance tax mitigation it is important to review your will and ensure that you fully understand how the reliefs will apply to your business and to make sure that you maximise the allowances that can be utilised against your Estate.
