Inheritance Tax (IHT) has reached a record level in the UK, with £7.5 billion flowing into Treasury coffers in 2023/24, up from £7.1 billion the previous tax year. One key reason for this growing tax take is rising property prices – the average house price in the UK has reached £288,949 according to Halifax – which, coupled with the lack of increase in the basic IHT thresholds since 2009/10, means more people are being pulled into the IHT net.

Currently your estate will face IHT at 40% if it exceeds £325,000. There is another allowance – the Residential Nil Rate Band – which gives you an additional £175,000 which can be used to pass your home to a direct descendant, such as your child or grandchild. This means you have a maximum of £500,000 that you can have in your estate before IHT is applied if you have children. But you can also use any of your spouse’s allowance that has been left unused if they died before you do.

Aside from this, there are numerous ways you can reduce your IHT liability during your lifetime, including making financial or asset-based gifts to relatives, using trusts effectively, and even surviving a gift you make by at least seven years. But one other way you can reduce your IHT liability is by using Business Relief.

How does Business Relief help to reduce IHT?

Business Relief is available for business owners, and on investments in companies that qualify for it. These shares can be within private companies, or companies listed on Alternative Investment Market (AIM) – the exchange for fledgling companies. Since these companies are smaller and often less established than those on the larger stock exchanges, such as the FTSE100 or the FTSE250, there is a higher risk of losing any investment you make. It may be harder to sell the shares in a private or smaller company if you needed to.

But on the plus side, any investment in a qualifying company is outside of the IHT net after just two years, rather than the seven years required for Potentially Exempt Transfers.

Will the investment always qualify for Business Relief?

You need to be holding the qualifying investment to get Business Relief when you die. But if the company has been successful and is listed on a larger exchange, such as the FTSE100, then it will no longer qualify for Business Relief. So, you need to keep a close eye on these investments if you want to be able to use them for IHT planning. You might need to invest in another company which will then need to be held for a further two years to qualify.

Another major benefit of using Business Relief is that the investment will be in your name, and if you need to have access to that money, then you can get it – if you are able to sell your shares in the company. This way you are not relinquishing control of your own assets while you are still alive.

What about if I am a business owner – what can I do?

If you own a business, then you can benefit from Business Relief on your own business if you die while you still own it. If there is a property associated with the business, there are a range of reliefs you can access. For example:

For deaths and transfers, on or after 6 April 1996, the categories of property which can qualify as relevant business property are broadly as follows with rate of relief:

  • Property consisting of a business or interest in a business: 100% relief.
  • Control holdings of unquoted securities in a company: 100% relief.
  • Unquoted shares in a company: 100% relief.
  • Control holdings of quoted shares in a company: 50% relief.
  • Land, buildings, machinery or plant used by a company controlled by the transferor or by a partnership of which the transferor was a member: 50% relief.
  • Settled land, buildings, machinery or plant in which the transferor had an interest in possession and used in his business (This applies to lifetime transfers only): 50% relief.

Source: M&G Wealth

There are various other ways business owners’ estates can benefit from Business Relief, but it is a complex area. You can find more information on Business Relief and how it works on GOV.UK. But the best way to maximise any benefit is to speak to your accountant, who can explain everything to you to ensure you don’t fall foul of the rules.

Contact us

If you are a business owner, or you want to know how Business Relief could help you with your IHT planning, then please get in touch with us and we would be delighted to help you understand what you can do to reduce your liability.