27/02/25
Estate planning for clients with business assets is an opportunity for you to flex your planning muscle and tax-efficiency expertise. But it can also be a bit of a minefield – and post-budget, some of the tools that are working for you and your clients now may be less effective if the government’s proposed changes come to pass.
Developing a will structure that best serves business owners often calls for the inclusion of additional clauses to help protect the business and its assets. It also requires a good working knowledge of Business Relief (BR) to maximise the breaks afforded to business owners and shareholders to mitigate any undue IHT.
Business Relief (BR) and entitlement
Business Relief is an Inheritance Tax Relief available to business owners and shareholders on the transfer of certain types of business and business assets. This could be during the owner’s lifetime; upon death, or on IHT payments due on relevant business property held in trust.
This all sounds very positive for your entrepreneurial clients, but in order to qualify for BR:
- The business must be set up with the main intention of generating a profit through its activities (trading co); this rules out businesses that are primarily investment ventures such as buy-to-lets.
- Assets must be relevant business property, that is, assets that are directly involved in the running and operation of the business such as machinery, premises, or land. However, a business that’s mainly comprised of land, buildings, property, stocks & shares, will not qualify for BR.
- The asset must have been owned by the transferor for a minimum of two years prior to transfer. (If the transferor dies before the two-year period is up, BR will only continue if the asset is passed to a spouse or civil partner.)
To BR or not BR?
Even with these guidelines in place, it’s important to remember that BR is a slippery fish. A business’ qualifying status can alter within its lifetime based on its activities and changing circumstances.
A real-life example of this is a property development company. The business started out buying houses, renovating them, and selling them at a profit. This business model focussed on income generated from the company’s activities, and so, the business qualified for BR.
However, when the market took a downturn, the company found sales of its properties dried up. To counter this, they started letting out the unsold properties within their portfolio – a resourceful pivot – but this changed their development venture into an investment company rather than a trading company, and so, under these circumstances, they lost their BR entitlement.
100% Business Relief?
In addition to this, there are two qualifying levels of BR: 100% relief and 50% relief.
Assets qualifying for 100% BR include:
- An interest in an unincorporated business
- Unquoted shares in a company carrying on a ‘qualifying business’
- Share in trading companies listed on Alternative Investment Market (AIM) or Unlisted Securities Market (USM)
- Holding in a BR qualifying investment
Assets qualifying for 50% BR include:
- Assets held personally by the transferor, but used wholly or mainly in a trading business they control or in a trading partnership in which they are a partner
Mixed estates
The dream scenario would be that a client’s estate falls clearly into the BR or not BR categories, but real life doesn’t work like that, and frankly, where’s the challenge?
The reality is, in many cases, clients with businesses are going to fall into a third, slightly muddied category of having a ‘mixed estate’, that is, one that incorporates a variety of activities and assets that are qualifying and non-qualifying, trade and investment.
An example of this is a landed estate, where the land supports a variety of ventures that are a mix of profit (trade) and investment. In such instances, the business is assessed for BR entitlement based on the percentage of time spent and profit generated in relation to trade activities or investment.
Business splits that are over 50% in favour of supporting trade activities – in terms of time spent on those activities and income generated from them – qualify for BR.
When dealing with clients’ mixed estates, it’s advisable to recommend the client use a professional or corporate executor as there is always the potential for contention over BR from HMRC during administration.
Will structures for clients with BR assets
In accordance with Section 39a Inheritance Tax act 1984, Business Relief attaches to assets which pass specifically to a particular beneficiary. In this sense, we’re dealing with legacies, and the beneficiary in question could be an individual or a trust.
If BR-qualifying assets are left to residue, its BR becomes detached from the asset and the relief will apply against the whole of the estate, even if part of it, such as a spouse or NRB allowance, would otherwise be exempt. In this instance, the Business Relief will go against those assets in proportion and the business asset that would have been relievable could now be subject to IHT.
To avoid this, it is essential BR assets are cited within the will and gifted as such, either to an individual or a business trust.
However, use caution when inserting business clauses as anything that’s too specific can lead to issues for beneficiaries further down the line. For example, citing shares in a specific business and using the company’s name could cause problems; if that business changes its name or sets up a new business, the will won’t acknowledge these shares.
A better, more futureproof solution is to simply include a clause that specifies any assets qualifying for BR after IHT has been applied to the estate should go to this (named) individual or trust.
IHT and BR post-budget
Last October, the government revealed significant changes to Business Relief and Agricultural Relief (AR) in its 2024 Budget announcement. It was proposed that the current rates of AR and BR will remain unchanged at 100% but only up to a combined £1m lifetime allowance that covers:
- Property in an estate on death
- Failed Potentially Exempt Transfers
- Chargeable Lifetime Transfers
Any remaining business assets over and above the £1m threshold will only qualify for 50% relief, taxed at half the death rate (20%).
Unlisted shares on recognised stock-exchange markets such as AIM will also only qualify for 50% BR with an effective tax rate of 20%, however these shares will not count towards an individual’s £1m lifetime allowance.
In situations where spouses or civil partners both have shares in business with relievable assets, each will have an allowance of up to £1m; however, this allowance will be non-transferable.
If they are passed, these proposed changes will be effective as of 6 April 2026, and in the coming months, the CTT team will be looking at solutions you can offer clients who may be impacted by these changes – watch this space!
The takeaway
If you have clients with qualifying BR assets and these are not specifically gifted in the will as such, they do not have sufficient planning in place and are at risk of incurring unnecessary IHT.
With this in mind, it’s a priority matter to revisit any planning for clients whom you suspect may have BR assets and review their current will structure to ensure they mitigate any risk of BT being reduced or wasted.
All the clauses you need to draft an effective business will can be found in our CTT Legacy Software.
If you have any questions on how CTT can support you and your clients with business assets, get in touch.
Written By