Business Property Relief on Company Shares After Death

Business Property Relief is one of the most valuable reliefs in the inheritance tax system. When it applies, it can reduce the IHT value of company shares to zero — potentially saving hundreds of thousands of pounds in tax on a family business. But the rules are specific, and there are traps for the unwary. This guide explains the key requirements and common issues executors and families encounter.

The 2-Year Ownership Requirement

To qualify for BPR, shares in an unquoted trading company must have been owned by the deceased for a continuous period of at least 2 years immediately before death. This is a strict requirement with limited exceptions:

• Replacement property rule: If the deceased sold one qualifying business interest and reinvested the proceeds in another qualifying interest within 3 years, the ownership periods can be combined to meet the 2-year test.
• Surviving spouse: If shares were inherited from a deceased spouse who owned them, the surviving spouse can inherit the deceased spouse’s period of ownership — meaning the combined period may satisfy the 2-year test even if the surviving spouse only held the shares briefly before their own death.
• No exceptions for short ownership: If the deceased had owned the shares for only 18 months, BPR is not available, regardless of the size of the estate or the trading nature of the company.

The 2-year period is counted from the date of acquisition to the date of death. Share certificates or company records showing the date of issue or transfer should be located early in the estate administration, as they are critical evidence for the BPR claim.

The Trading Test: Trading vs. Investment Companies

BPR is available for shares in companies that are “wholly or mainly” carrying on a qualifying business. A qualifying business is one that is trading — buying and selling goods or services — rather than holding investments.

The following types of business generally qualify for BPR:

• Manufacturing, retail, professional services, construction, technology, hospitality, and most other trading businesses
• Farming and agricultural businesses (though Agricultural Property Relief may also apply)
• Businesses with mixed activities where the trading element is the predominant activity

The following do not qualify for BPR:

• Investment companies: Companies whose main activity is holding shares, property, or other investments — such as property investment companies or family investment companies used purely for holding wealth
• Businesses mainly dealing in securities, stocks, shares, land, or buildings
• Businesses of making or holding investments — a phrase HMRC interprets broadly

The “wholly or mainly” test means that more than 50% of the company’s activities (measured by turnover, profit, assets, time, or a combination) must be trading. HMRC may look at all these factors together rather than applying a single metric.

Mixed-Use Businesses: Splitting the Relief

Many real-world businesses have both trading and investment elements. A manufacturer that also owns a significant investment property portfolio, for example, would have mixed activities. In these situations, BPR is not all-or-nothing: HMRC will apportion the relief between the qualifying trading activities and the non-qualifying investment activities.

The apportionment is based on what proportion of the overall business is represented by qualifying trading activities. HMRC may use a combination of asset values, turnover, and profit to determine this proportion. The result is that only a fraction of the shares’ value qualifies for BPR.

For example, if HMRC determines that 70% of the company’s value represents trading activities and 30% represents investments, then only 70% of the shares’ value qualifies for 100% BPR — effectively a 70% relief on the whole holding.

It is common for executors and HMRC to reach different views on the proportion, and this is an area where professional advice from a tax adviser with BPR experience is strongly advisable before submitting the IHT400.

How to Claim BPR on the IHT400: Schedule IHT413

BPR on company shares is claimed using schedule IHT413 (Business or Partnership Interests and Assets). This schedule must be completed and submitted alongside the main IHT400 form. It requires:

• Full details of the company (name, registered number, nature of business)
• The date the deceased acquired the shares and the period of continuous ownership
• The value of the shares as at the date of death — this requires a formal valuation of the company, usually prepared by an accountant or business valuations specialist
• A description of the company’s activities, including any non-qualifying elements
• Details of any excepted assets (see below) that should be excluded from the relief

HMRC may raise queries on any BPR claim, particularly on larger company shareholdings. Providing comprehensive evidence of the company’s trading nature — recent accounts, management accounts, a description of business activities — alongside the IHT413 can reduce the likelihood of a prolonged enquiry.

The Excepted Assets Trap: Surplus Cash on the Balance Sheet

Even where a company qualifies as a trading company and the 2-year ownership rule is met, part of the BPR claim may be disallowed if the company holds “excepted assets.” An excepted asset is one that:

• Was not used wholly or mainly for the purposes of the business throughout the 2 years before death, and
• Is not required at the time of the transfer for future use in the business

In practice, this most commonly affects cash and liquid investments held on the company’s balance sheet that are surplus to trading requirements — cash that is not needed as working capital but has simply accumulated over the years without being distributed.

HMRC will look at the company’s balance sheet and assess what level of cash is genuinely needed for the business. Cash required for upcoming capital expenditure, a planned acquisition, or working capital needs can be justified as trading assets. Cash well in excess of these needs is treated as an excepted asset, and its proportionate value is stripped out of the BPR claim.

Families are sometimes surprised to find that a profitable business with several years’ worth of profits sitting in the company account loses a significant proportion of its BPR entitlement. If you are dealing with such an estate, specialist advice is essential before filing the IHT400.