Understanding Business Relief and Inheritance Tax in the UK

When it comes to estate planning, business relief inheritance tax is one of the most powerful yet underused tools for reducing liability. If you own a qualifying business or shares in one, business relief can significantly reduce the value of these assets when calculating inheritance tax (IHT), potentially bringing your liability down to zero.

This article explores how business relief inheritance tax works, who qualifies, and how it fits into an effective estate planning strategy. If you’re a business owner or investor looking to protect your wealth, this guide is for you.

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What Is Business Relief for Inheritance Tax?

Business relief inheritance tax is a provision that allows certain types of business assets to be passed on either tax-free or at a reduced rate upon death. It applies to qualifying business property and is available at either 100% or 50% depending on the type of asset and your role in the business.

This relief can apply to:

• Shares in unlisted companies
• Sole trader or partnership businesses
• Land, buildings, or machinery used in a business

The main purpose of business relief is to encourage entrepreneurship and investment by allowing family businesses to pass down wealth without being penalised by excessive IHT charges.

How Much Relief Can You Claim?

There are two levels of business relief:

100% Business Relief

This applies to:

• Ownership of a business or interest in a business (e.g. a sole trader or partnership)
• Shares in an unlisted company

If eligible, these assets are completely exempt from inheritance tax, no matter their value.

50% Business Relief

This typically applies to:

• Shares in a quoted company where the donor had control (more than 50% of voting rights)
• Land, buildings, or machinery owned personally but used in a qualifying business

In these cases, the value of the qualifying assets is reduced by half before IHT is calculated.

Who Qualifies for Business Relief?

To qualify for business relief inheritance tax, the business assets must have been owned for at least two years before the person’s death. Additionally, the business must be a qualifying business, meaning:

• It must be trading, not an investment business
• It must not be wholly or mainly involved in securities, stocks, land or buildings (unless these are incidental to a trade)
• It must be UK-based or include UK operations if it’s international

If you’re unsure whether your business qualifies, seek expert advice. HMRC applies strict definitions and the line between a “trading” and an “investment” business can be nuanced. You can review HMRC’s guidelines on what qualifies for business relief.

Business Relief and Estate Planning

Integrating business relief into your estate plan can dramatically reduce your family’s inheritance tax burden. Here’s how:

Gifting Business Assets

You can gift business property during your lifetime and, provided you survive for seven years, the gift becomes free of IHT. If you die within seven years, business relief may still apply if the recipient continues to meet the conditions.

Holdings in AIM Shares

Investing in Alternative Investment Market (AIM) shares that qualify for business relief is another effective way to shield value from IHT. This strategy allows investors to benefit from tax-free transfer of wealth while retaining ownership.

However, these shares can be high-risk and volatile, so it’s crucial to work with a financial adviser who specialises in AIM portfolios.

Passing on a Family Business

If you run a family business, structuring ownership through partnerships or shareholdings can ensure that the business passes on intact, tax-free. Succession planning is key, and business relief can help you preserve generational wealth.

Limitations and Exclusions

Business relief is powerful, but it’s not universal. Here are some important exclusions:

• Businesses involved mainly in investment (e.g. rental property or securities) do not qualify
• Assets not used for business purposes in the last two years may be excluded
• Non-UK businesses may not qualify unless they have substantial UK operations

Also, once a business is sold, it loses eligibility unless the sale proceeds are reinvested into another qualifying business within three years.

Case Study: Using Business Relief to Save on IHT

John was a 68-year-old entrepreneur who owned a successful unlisted construction company. When he passed away, his shares were worth £1.2 million. Thanks to his estate planner’s advice, his shares qualified for 100% business relief inheritance tax, saving his family nearly £480,000 in tax liability (at the 40% IHT rate).

This example shows the potential savings when business relief is applied strategically—and legally.

How to Apply for Business Relief

Business relief is claimed by the executor of the estate during the probate process using the Inheritance Tax account (form IHT400). Supporting evidence must include:

• Business accounts
• Share certificates (if applicable)
• Detailed valuation reports
• Trust documents (if relevant)

Professional advice is highly recommended to avoid disputes with HMRC and to ensure the claim is valid and well-documented. Book your consultation now to get tailored advice for your circumstances.

Combining Business Relief with Other Strategies

While business relief is effective on its own, combining it with other strategies can offer maximum protection:

• Trusts – Consider placing business assets in a discretionary trust to add control over how the assets are used
• Gifting – Strategic lifetime gifting can remove non-qualifying assets from your estate over time
• Spousal Transfers – Transfers to a spouse or civil partner are exempt from IHT and can delay tax liabilities

To explore the full range of options, visit our Inheritance Tax Planning page or review this MoneyHelper guide on inheritance tax.

Frequently Asked Questions

Does business relief apply automatically?

No, it must be claimed by the executor or estate representative with supporting documentation.

Do shares in listed companies qualify?

Only if they are in AIM-listed companies that meet the trading criteria. Normal FTSE companies usually do not qualify.

Can business relief reduce tax to zero?

Yes, if your qualifying business assets make up the majority of your estate, business relief can potentially eliminate IHT altogether.

Can I use business relief after selling my company?

You can retain the benefit if you reinvest the proceeds into a qualifying business within three years.

Conclusion: Use Business Relief to Protect Your Legacy

Business relief inheritance tax is a strategic tool for business owners and investors to pass on wealth tax-efficiently. If you own or hold shares in a qualifying business, it’s essential to understand how this relief can protect your estate.

With careful planning, business relief can reduce or eliminate inheritance tax—helping you preserve your legacy for future generations.

Need help securing your business for your heirs? Book a free consultation or explore our affordable pricing to get started with expert inheritance tax planning today.