HMRC Inheritance Tax: Customer Guide

Tell me about business relief and businesses



When can I claim business relief?

You can claim business relief on transfers of certain types of business and of business assets if they qualify as relevant business property and the transferor has owned them for a minimum period.

You can claim the relief for transfers made during the person’s lifetime and on death and on chargeable occasions arising on relevant business property held in trust.

The relief reduces the value transferred by a transfer of relevant business property.


On what types of business property can I claim the relief?

You can claim business relief on

  • a business or an interest in a business (such as a partner in a partnership)
  • unquoted shares This includes shares which are traded in the Unlisted Securities Market (USM shares) or the Alternative Investment Market (AIM shares). Shares that are listed on a recognised overseas stock exchange are quoted for IHT purposes, even if they are also traded in the AIM or USM.
  • a holding of shares or securities owned by the transferor, which are fully listed on a recognised Stock Exchange, which themselves or with other listed shares or securities give control of a company
  • land, buildings, plant or machinery owned by a partner or controlling shareholder and used wholly or mainly in the business of the partnership or company immediately before the transfer
    (This applies only if the partnership interest or shareholding would itself, if it were transferred, qualify for business relief.)
  • any land, or buildings, machinery or plant which was used wholly or mainly for the purpose of a business carried on by the transferor and was settled property in which the transferor was beneficially entitled to an interest in possession and used in the transferor’s business.


What is the rate of the relief?

If the asset qualifies for relief, the rate at which it is allowed is shown in the table below. The relief is given by deducting the relevant percentage of the capital value of the asset. For transfers before 6 April 1996, see the 'Rate of relief' table on page 35 of the IHT400 Notes - Guide to completing your Inheritance Tax Account

  Date of death after
6 April 1996
A business or interest in a business 100%
A holding of shares in an unquoted company 100%
Control holding of shares in a quoted company (more than 50% of the voting rights) 50%
Land, buildings or plant and machinery used in a business of which the deceased was a partner at the date of death or used by a company controlled by the deceased 50%
Land, buildings or plant and machinery held in a trust where the deceased had the right to benefit from the trust and the asset was used in a business carried on by the deceased 50%


On what type of businesses can I not claim the relief?

You will not be able to claim the relief if the

  • business or company is engaged wholly or mainly in dealing in securities, stocks or shares, land or buildings, or in making or holding investments
  • business is not carried on for gain
  • business is subject to a contract for sale, unless that sale is to a company which will carry on the business, and the sale is made wholly or mainly in consideration of shares in the company buying the business
  • shares in the company are subject to a contract for sale or the company is being wound up, unless the sale or winding up is part of a reconstruction or amalgamation to enable the business of the company to be carried on

Relief may be available for

  • the business of a market maker or discount house in the United Kingdom
  • shares or securities in a company which is a holding company and the group is not wholly or mainly engaged in property, investment or dealing


How do I calculate the value of relevant business property?

If you are deducting business relief at 100% from the value of the deceased’s business or interest in a business, you can include the value of the business as shown in the company’s accounts.

If you are not deducting business relief at 100%, you will have to adjust the value taken from the company’s accounts to ensure that you include the open market value of the business rather than the book value.

Individual assets in the business, such as land and buildings, stock, goodwill and machinery may be included at book value. If so you will need to obtain open market values for those assets and substitute the open market value for the book value to arrive at an open market value for the business as a whole.


Do all assets of a business get relief?

No, property that is an excepted asset will not qualify for business relief.

What is an excepted asset?

An asset is excepted if it is

  • not used wholly or mainly for the purposes of the business throughout the two years immediately before the transfer (or since its acquisition by the business if more recent)
  • not required at the time of the transfer for identified future use for the purpose of the business, or
  • used wholly or mainly for the personal benefit of the transferor, or a person connected with the transferor (e.g. the spouse, a child or other relative of the transferor).


What if an asset is not used mainly by the business?

If any land or building is an excepted asset but part of it is used exclusively for the purposes of the business, we regard that part as a separate asset. Provided the conditions for business relief are satisfied, we take that part into account in determining the value of relevant business property.


How do you treat shares in a holding company?

Special rules apply if the relevant business property is a controlling shareholding in a holding company. If the group includes any company whose own business falls outside the scope of the relief, business relief is only given on the value that would be appropriate if that company were not part of the group. In applying the rules for excepted assets, the group is considered to be one concern.


Is there a minimum period of ownership?

Yes. The general rule is that property is not relevant business property (and so does not qualify for relief) unless it was owned as such by the transferor throughout the two years immediately before the transfer.

Points to note regarding the minimum period of ownership

  • If the transferor became entitled to the property on the death of a spouse or civil partner, relief is available for any period during which the spouse or civil partner owned it.
  • If the transferred property was acquired on an earlier transfer within the two-year period, relief is available if
    • the earlier transfer was eligible for business relief
    • the earlier transfer was made to the current transferor or spouse or civil partner
    • one of the transfers was made on death, and
    • the property, apart from the two-year rule, would qualify for relief.
  • Relief is available when the transferred property replaces other relievable property
  • If the transferor inherits the property on a death, we consider the ownership to run from the date of that death.


Is business relief available on a gift of business property?

Business relief is only given if, or to the extent that, the gifted property

It is available at the rate appropriate to the property at the time the gift occurred.


What happens if only part of the gift qualifies for relief?

If, at the date of the transferor’s death, the conditions for relief are satisfied for only a part of the gifted property, a proportionate part of the value that was transferred is reduced.

If the transferee dies before the transferor the conditions for relief have to be satisfied at both the

  • date of gift, and
  • time of the transferee’s death


Does a change in the share capital affect how shares are treated?

If the transferee is given shares and, as a result of a reorganisation of share capital or take-over bid, receives other shares, we treat those other shares as the original property.

If, after the gift but before the transferor’s death, the transferee receives shares in a company in consideration for the sale to that company of the property that has been given, the shares are treated as the original property.


What are the rules for replacement property?

Where the original relevant business property was disposed of before the transferor’s death and the proceeds were used to buy replacement property, the relief is not necessarily lost.

In order to still qualify for relief

  • the whole of the sale proceeds must have been used to purchase the replacement property, and
  • both the sale and purchase must have been arm’s length transactions taking place within three years of each other.

The replacement property must also be of such a nature that, if it was transferred by the transferee immediately before the death of the transferor, it would, apart from the minimum period of ownership requirement, qualify for relief.


Tell me about the relief available where the owner has replaced business property before the transfer?

Generally, property is treated as satisfying the two-year ownership test if

  • it replaces other property (which may have replaced other property and so on)
  • the transferor owned property in the chain for periods amounting to at least two years during the five years immediately before the transfer, and
  • each item in the chain, which is taken into account for the two year ownership period, would have been relevant business property (apart from the length of ownership) if the transfer of value had taken place immediately before the item was replaced


What happens if shares are exchanged for other shares?

Where shares are exchanged for other shares, the time of ownership of the previous shares counts towards the two year period. This can happen in a capital reorganisation or company amalgamation
or reconstruction.


Immediately before the transfer, Ben owns a minority holding of unquoted (including USM and AIM shares. He received the shares within the two year period in exchange for other shares in a capital reorganisation. Ben’s ownership of the previous shares counts towards the two year period if the shares themselves qualified for relief.


What if a replacement appears to give more relief than would have been available?

The relief cannot exceed what would have been due had the replacement not occurred. For this purpose, we disregard changes resulting from the

  • formation, alteration or dissolution of a partnership
  • acquisition of a business by a company controlled by the deceased or transferor.


Can I pay tax on business property by instalments?

Yes, if inheritance tax is due and the business property is not covered by 100% business relief, you will be able to pay the tax by instalments on

  • certain shares and securities
  • the net value of a business or an interest in a business, including a profession or vocation, carried on for gain (this does not include individual assets of a business, which are distinct from the business as a whole).


When are instalments interest-free?

In some cases, where you are able to pay inheritance tax on businesses by instalments, we only charge interest while the instalments are in arrears. Each instalment is interest-free if paid on time.

Instalments of inheritance tax are interest-free (if the instalments are paid on time) if the tax is attributable to

  • shares or securities which qualify for payment by instalments. Shares in an investment or property company (whether a dealing or holding company) qualify only if the company is either
    • primarily a holding company of companies, which themselves are not investment or property companies, or
    • a market maker or discount house in the United Kingdom
  • a business or interest in a business carried on for gain


What shares or securities qualify for payment by instalments?

You may be able to pay tax attributable to shares or securities in a company by instalments if

  • they gave the deceased control of the company at the time of the transfer
  • they are unquoted and either
    • you can show that the tax attributable to their value could not be paid in one sum without undue hardship, or
    • at least 20% of the tax for which the same person is liable in the same capacity is attributable to assets (including the shares in question) that qualify for payment by instalments, or
  • in the case of unquoted shares only, their value exceeds £20,000 and the shares transferred represent at least 10% of the nominal value of
    • the company’s share capital, or
    • the ordinary share capital (if they are ordinary shares).