17 January 25

The relationship between Business Relief and inheritance tax

For almost 50 years, Business Relief has been a valuable relief from inheritance tax (IHT) for business owners. But you don’t need to be a business owner to benefit from Business Relief.  

What is Business Relief? 

Business Relief is a tax relief with quite a long history. It was introduced by the UK government in 1976 to make it easier for family-owned businesses to be passed from one generation to the next, without triggering a large inheritance tax (IHT) bill that forced the heirs to sell the business. 

Today, Business Relief has become an important IHT relief, claimed not only by family-owned businesses, but also by investors in Business Relief-qualifying companies.  

How does Business Relief help with IHT? 

As a reminder, IHT is charged at a standard rate of 40% on estates valued at more than the current £325,000 threshold.  

Generally, when calculating the value of someone’s estate, if they own a business or shares in a business, those shares will be included as part of the evaluation for IHT purposes.  

However, if the company qualifies for Business Relief, an estate can claim IHT relief on the value of the shares owned, provided the deceased owned the business or shares in the business for at least two years before their death. 

How to invest in Business Relief-qualifying companies 

One of the simplest ways for someone to take advantage of the IHT relief offered through Business Relief is to choose a dedicated investment manager – such as Triple Point – to set up an investment portfolio on their behalf. 

The investment manager will invest their money into companies it expects to be Business Relief-qualifying. Once the investment has been held for at least two years, providing they are still held when the investor dies, the shares can be passed to the investor’s beneficiaries without them facing an IHT bill on the amount invested. 

Which companies are eligible for Business Relief? 

Not all businesses will be eligible for Business Relief. For example, it can be claimed on the value of shares in some ‘unquoted’ qualifying companies. An unquoted company simply means a company whose shares are not listed on a major stock market like the London Stock Exchange. This includes privately-owned companies, sole trader businesses, and limited liability partnerships.  

But to meet the criteria determined by HMRC, it must also be a trading company (not created just for investment purposes) or be involved in a qualifying trade or business activity.  

Can a company be listed on AIM and also qualify for Business Relief? 

Yes. The Alternative Investment Market (AIM) is a sub-market of the main London Stock Exchange which was launched in 1995. Shares in AIM-listed companies are considered ‘unlisted’ for tax purposes, because the shares are not subject to UK Listing rules. This means that provided the company meets the other eligibility criteria set by HMRC, shares in many AIM-listed companies can be eligible for Business Relief.  

Which companies are not eligible for Business Relief? 

A company won’t qualify for Business Relief if: 

  • It is listed on the main London Stock Exchange 
  • It deals in stocks and shares, land or buildings 
  • It is a not-for-profit organisation 
  • Is being sold or being wound up and will no longer carry on its business 

How is Business Relief claimed by estates? 
Business Relief has to be applied for either by the executor of the deceased’s will or the administrator of their estate. This application is made by completing Inheritance Tax Return Form IHT400 and making a claim for Business Relief in the relevant section.  

HMRC will confirm whether a claim for Business Relief has been accepted and applied when the estate is notified of any IHT due on the estate. 

How is Business Relief changing? 

Currently, shares in a company that qualifies for Business Relief (BR) are fully exempt from IHT after a two-year holding period. However, the Autumn 2024 Budget announced that the following changes will come into effect from April 2026: 

  • For shares in an ‘unquoted’ company that qualifies for Business Relief: The rate of Business Relief that can be claimed is 100% on the first £1 million of shares, and reduces to 50% for amounts over that threshold. That’s equivalent to an IHT rate of 20%. 
  • For shares in AIM-listed companies that qualifies for Business Relief: Business Relief can be claimed at a flat rate of 50% on any value of shares. That’s also equivalent to an IHT rate of 20%. 
     

These changes mean that for the first time since it was introduced, from April 2026 there will be a threshold that reduces the amount of Business Relief that can be claimed, and therefore the rate of available IHT relief.  

 

Important information 

Tax treatment depends on the individual circumstances of each client and is subject to change. Tax relief depends on the companies we invest in maintaining their qualifying status. As with any investment, there is no guarantee that the target return will be achieved and investors may get back less than the amount they invested. 

Tags on this post: adviser education, br, estate planning, iht