Business Property ReliefInheritance TaxWillsBusiness Property Relief – Considerations When Drafting Wills

Business property relief (BPR) is a potentially very valuable relief for inheritance tax (IHT). There are however a number of considerations that need to be given when drafting a will to ensure that the most is gained from the relief and it ensure that the relief is not “wasted”. This article will cover various considerations that need to be given when drafting a will for a person with BPR qualifying assets.

What is Business Property Relief?

BPR is a relief from inheritance tax (IHT) for certain business assets. When its conditions are met, the value of gifts of the business assets are reduced for IHT purposes by either 100% or 50%. The main aim of BPR is to reduce the risk of IHT charges causing the break-up of a business during a succession.

Gifts That “Waste” Business Property Relief

There are three particular circumstances where BPR could be “wasted”:

  1. Where BPR qualifying assets pass to a beneficiary who is exempt from IHT;
  2. Where BPR qualifying assets are split between exempt and non-exempt beneficiaries;
  3. Where gifts are made to spouses/civil partners and BPR is lost between first death and death of the survivor.
1. Gifts to Exempt Beneficiaries

If the business is specifically gifted to a spouse, civil partner or charity, the relief is effectively wasted on death. A gift to a spouse, civil partner or charity is already exempt from IHT due to the spousal exemption and charitable exemption for IHT. If there are other gifts to non-exempt beneficiaries in the will, for example to children, BPR will not apply to those other assets as BPR only attaches to the business assets. In this type of circumstance, it may make more sense from an IHT perspective to make a gift of the BPR assets to the non-exempt beneficiaries, however noting that where there is a spouse/civil partner a gift to the other beneficiaries may not be in their best interests as the survivor may have need of the business assets.

2. Gifts Between Exempt and Non-exempt Beneficiaries

Where business is shared between exempt and non-exempt beneficiaries, this potentially could lead to an increase of the amount of IHT due. This is best illustrated with an example.

Say Mr Jones has a business qualifying for BPR at 100% worth £300,000 and other assets worth £700,000. His will gives his residuary estate 50% to a charity and 50% to his brother, there are no other gifts.

For IHT purposes, Mr Jones’ gross estate (before deduction of reliefs and exemptions) is £1,000,000. The charity and brother are each is entitled to 50% of this (£500,000). For the purpose of the business, each will be treated as inheriting 50%.

IHT on the charities share is nil due to the charitable exemption.

For the brother’s share of the estate, IHT will be calculated as follows:

The brother’s share of the estate (£500,000) minus BPR over his 50% of the business (£150,000) = £350,000

£350,000 minus NRB (£325,000) = £25,000

£25,000 x 40% = £10,000

The BPR on the charity’s 50% of the business is wasted in this situation.

If Mr Jones’s will instead gifted the business to his brother, BPR could be fully utilised and this would reduce IHT on the estate to nil.

3. Gift to Spouse/Civil Partner

Another consideration when considering a gift of BPR assets to a spouse/civil partner is what happens on the death of the spouse/civil partner must also be considered. If a business qualifies for BPR at 100% on the second death, it will pass IHT free. But there is the possibility that by the time second death occurs that BPR may not be available, for example:

  • The survivor may not want to run their late spouse’s business;
  • A business partner may want to buy the deceased’s shares off the survivor;
  • The survivor may decide to run the business for a while but eventually sell it on in their old age to retire; or
  • The business could be run in such a way that BPR no longer qualifies at the date of death.

This would lead to an increased IHT liability, as an asset which is IHT exempt (a qualifying business) is replaced by one subject to IHT (a non-qualifying business or cash) because BPR can no longer be applied.

A Business Property Relief Trust could be considered to combat the relief being lost. This is a discretionary trust, which takes all assets which qualify for BPR.

The trust is its own legal entity, and it will own the business rather than the surviving spouse/civil partner. Should the business be sold between first and second death, the surviving spouse’s estate is unaffected as the trust owns owning the proceeds rather than the survivor.

A letter of wishes is usually drafted to state that the spouse is to be treated as the main beneficiary of the trust whilst they are still alive. Upon their death, the letter of wishes could either direct that the trust be wound up and assets distributed to the beneficiaries, or alternatively it could continue to run if there a need to protect assets for any of the beneficiaries.

Other Considerations

Giving the BPR qualifying assets to a beneficiary that is not IHT exempt (such as a BPR trust) instead of a beneficiary that is IHT exempt (i.e. a spouse), HMRC will be forced to make a decision as to whether the business assets qualify for BPR. If a spouse inherits, or is treated as inheriting due to an Immediate Post Death Interest (IPDI) trust, HMRC do not need to make a decision on whether the business qualifies for BPR as the spousal exemption applies. Knowing whether the business qualifies or not can affect the planning that the spouse wishes to make in the future, for example if the business did not qualify for the relief, they may wish to undertake more lifetime planning than they would if the business did qualify.


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Photo by Tyler Franta on Unsplash

Chris Rattigan-Smith