(Don’t fear) the reaper!

Peter Rayney explores the imminent changes to business property relief and how they affect succession planning in owner-managed companies. 

Many owner-managers feel that Autumn Budget 2024 was not business-friendly. The media fallout picked up on the apparent ‘ravaging’ changes to the inheritance tax (IHT) regime, focusing in particular on the restrictions in business property relief (BPR) and agricultural property relief (APR).  

The ‘good old days’ 

Historically, shareholdings in unquoted ‘qualifying’ trading companies have generally been fully exempt from IHT on death, on lifetime chargeable transfers and on failed potentially exempt transfers (PETs) (IHTA 1984, Pt 5, Ch 1). This is because owner-managers have been able to claim 100% BPR provided they held their shares for at least two years, subject to possible restrictions where the company held assets that were not being used for genuine business purposes – such as ‘surplus’ cash.  

The combination of 100% BPR and the capital gains tax (CGT) rebasing of their shares to market value on death has persuaded many owner-managers to retain their shares until they die. While this often fed into the owner-manager’s personal psyche – ‘it’s my company’, ‘I need to be in charge’ and so on – it seldom facilitated efficient succession planning! Their adult children or senior management who worked hard in the business without any meaningful form of ‘equity stake’ often felt demotivated and under-appreciated. 

Of course, sensible succession planning will vary from business to business, since it has to consider the family dynamics and the specific circumstances of each company. And the forthcoming restrictions to BPR will not change that for the majority of owner-managed businesses.  

What do the BPR changes mean?  

It is important for owner-managers to get the BPR changes into perspective. They will still be able to access 100% BPR but (from 6 April 2026) only to the extent that the value of their shares for IHT purposes does not exceed their personal £1m 100% BPR limit (tested on a lifetime basis).  

If the fiscal value of their shares exceeds this limit, 100% BPR is only given on the first £1m, with the ‘excess’ amount only attracting 50% BPR. Owner-managers would therefore suffer a 20% IHT charge on the ‘excess’ value of their shareholding above £1m. The £1m limit is shared with APR, so the maximum amount qualifying for 100% BPR and 100% APR cannot exceed £1m in total. Unlike the IHT nil-rate band or residence nil-rate band, it is not possible to transfer the BPR £1m limit between spouses or civil partners. 

Example 1: BPR before 6 April 2026 

Vera died on 3 February 2025. 

Her estate included a 78% shareholding in Snook Property Developments Ltd (SPDL), which she has held for many years. The value of her shareholding has been agreed at £1,240,000 with HMRC. 

SPDL is a ‘qualifying’ trading company for BPR purposes.  

Vera’s 78% holding attracts 100% BPR, and is therefore fully exempt from IHT. 

Example 2: BPR after 5 April 2026 

Vera died on 1 May 2026, but the facts are otherwise the same as in Example 1.  

Since Vera died after 5 April 2026, her 100% BPR entitlement is subject to the £1m cap. 

Her BPR claim would therefore be calculated as follows: 

Therefore, the £120,000 not covered by BPR would be liable to IHT (subject to any available nil-rate band, etc.) 

Value of shareholding below £1m 

Based on HMRC’s recent statistical data, the majority of BPR claims are for shares and other qualifying business assets worth less than £1m. Thus, a large number of owner-managers should not be affected by the future imposition of the £1m 100% BPR limit. However, they should still monitor their personal BPR position for any significant increase in value of ‘their’ company, etc. 

Making suitable lifetime transfers of shares to the next generation is still seen as a sensible part of succession planning. The gifted shares would qualify as a PET and thus be subject to the seven-year survivorship rule – so this is best done at an appropriate time when the owner-manager is (and is likely to remain) in good health. The consequent capital gain on the gift (computed at market value) can normally be held over under the business asset gift rules in TCGA 1992, s 165. Do not forget the ‘trading’ company or group requirements for holdover relief broadly require that 80% of the total business activities are trading, which is more stringent than the ‘mainly trading’ rule for IHT BPR purposes. 

Perhaps the greatest fear of most owner-managers is their children divorcing after they have ‘gifted’ them a significant equity stake in the company. Thus, while lifetime gifting of shares to the next generation may often be wise, the downside risk is that the shares will be potentially compromised on a future divorce settlement. This is sometimes a difficult choice. Owner-managers might therefore opt for a family discretionary trust to hold some or all the shares. The trust invariably offers suitable protection in the event of a marital break-up, but the transfer into trust would be a chargeable transfer for IHT purposes. However, until 6 April 2026 and subject to the important anti-forestalling rule (see below), the transfer would be fully sheltered by 100% BPR.  

Value of shareholding over £1m 

Some owner-managers will be hit by the £1m 100% BPR limit. They will have an even greater incentive to make suitable lifetime gifts to their spouses, adult children or suitable family discretionary trusts. Where the value of the company is very large, the owner-manager might consider fragmenting their shareholding amongst close members of the family – although there will often be other factors that affect this planning. 

In some circumstances, it may be prudent to transfer a suitable amount of shares to their spouse. Their spouse would have their own £1m 100% BPR ‘allowance’ and thus would also be able to access the 100% BPR exemption (making £2m complete 100% BPR protection between them. The couples’ wills may need to be re-drafted to ensure the planning works as expected. Married couples often have ‘reciprocal clauses’ in their wills, so their personal estates would pass to the survivor on death. This may have a ‘bunching’ effect on the surviving spouse’s death – since they would have an enlarged shareholding but only a single £1m 100% BPR allowance.  

Therefore, spouses should consider transferring some or all their ‘family’ company shares on death to a family discretionary trust, to ensure they do not waste their personal £1m allowance.  
 

Important anti-forestalling rule  

While the new BPR rules do not bite until 6 April 2026, they are subject to an important forestalling rule. This stipulates that the BPR restrictions apply to lifetime transfers (either PETs or immediately chargeable transfers) made after 30 October 2024 (Budget Day), where the transferor dies after 5 April 2026.  

Example 3: Setting up a discretionary trust – The anti-forestalling rule 

Aiden is a 100% shareholder in Kenny Logistics Ltd, which has been trading since 2011. 

In December 2024, six weeks after the Autumn Budget 2024, Aiden transfers 30% of his shareholding into a family discretionary trust for the benefit of his wife and children and so on.  

The value of the 30% holding transferred into the trust is £2,800,000. However, since the transfer takes place before 6 April 2026, 100% BPR is fully available to completely exempt the chargeable transfer for IHT purposes. 

Unfortunately, Aiden dies in a workplace accident in May 2027. Since Aiden’s chargeable transfer into trust occurred within seven years of his death, the IHT has to be recalculated on his death. BPR is still available on the re-computation as the trust still holds the shares. However, since Aiden died after 5 April 2026, the BPR used in the calculation is subject to the 100% BPR restriction rule, as shown below.  

Practical tip 

Remember the proposed BPR changes are subject to the Finance Bill 2024-25 receiving Royal Assent, and there may be some changes before then. It is therefore prudent to wait until the final position is clear before embarking on any tax planning.