Learning Outcomes
After reading this article, you will be able to identify which business and agricultural assets qualify for relief from Inheritance Tax (IHT), distinguish between Business Property Relief (BPR) and Agricultural Property Relief (APR), apply the correct relief rates, and explain the technical requirements for ownership, trading status, and asset use. You will also be able to analyse how these reliefs apply to both lifetime transfers and transfers on death, and understand their interaction in practical estate planning scenarios.
SQE1 Syllabus
For SQE1, you are required to understand the technical operation and application of IHT reliefs for business and agricultural property. In your revision, focus on:
- the scope and conditions for Business Property Relief (BPR) and Agricultural Property Relief (APR)
- the types of assets and businesses that qualify for each relief
- the rates of relief and how to calculate the reduced value for IHT
- the ownership and trading requirements for reliefs to apply
- how BPR and APR interact, including where both may be available
- the application of reliefs to both lifetime transfers and transfers on death
- the effect of reservations of benefit and anti-avoidance rules
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- Which types of business assets qualify for 100% Business Property Relief on a transfer of value for IHT?
- What is the minimum ownership period required for BPR or APR to apply?
- How does Agricultural Property Relief differ from BPR in terms of the value it relieves?
- Can both BPR and APR apply to the same asset? If so, how are they applied?
- What is the effect of a donor reserving a benefit in business or agricultural property after making a lifetime gift?
Introduction
Inheritance Tax (IHT) is charged on the value of a person’s estate on death and on certain lifetime transfers. However, the law provides significant reliefs for business and agricultural property, recognising their economic and social importance. These reliefs—Business Property Relief (BPR) and Agricultural Property Relief (APR)—can reduce or eliminate IHT on qualifying assets, but only if strict statutory requirements are met.
Business Property Relief (BPR)
BPR is designed to prevent the forced sale of businesses to pay IHT. It reduces the value of relevant business property for IHT purposes, sometimes to zero.
Key Term: Business Property Relief (BPR)
A statutory relief that reduces the value of qualifying business assets for IHT, either by 100% or 50%, depending on the asset type.
Qualifying assets
BPR applies to the following assets, provided they have been owned for at least two years before the transfer:
- A business or an interest in a business (100% relief)
- Shares in an unquoted trading company (100% relief)
- Securities in an unquoted company giving control (100% relief)
- Shares in a quoted company giving control (50% relief)
- Land, buildings, or machinery used in a business carried on by a company controlled by the transferor or a partnership of which they are a member (50% relief)
Key Term: unquoted trading company
A company whose shares are not listed on a recognised stock exchange and which carries on trading activities, not mainly investment activities.
Trading requirement
BPR is only available if the business is wholly or mainly trading. Businesses mainly holding investments, dealing in securities, or dealing in land or buildings do not qualify.
Key Term: trading business
A business that is not mainly engaged in investment activities, but in providing goods or services for profit.
Ownership period
To claim BPR, the transferor must have owned the asset for at least two years before the transfer (or have replaced qualifying property within the last five years).
Rates of relief (BPR)
- 100% relief: for a business, an interest in a business, or shares in an unquoted trading company
- 50% relief: for certain assets, such as shares in a quoted company giving control, or land/buildings/machinery used in a business but owned personally
Restrictions and exceptions
BPR is not available for:
- Businesses mainly holding investments
- Assets not used for business purposes in the last two years
- Assets subject to a binding contract for sale at the time of transfer
Key Term: excepted asset
An asset held by a business that is not used wholly or mainly for business purposes in the two years before transfer, or not required for future use in the business.
Worked Example 1.1
A owns 100% of the shares in an unquoted trading company. He dies, leaving the shares to his daughter. The company owns a rental property not used in the trade.
Answer: The shares qualify for 100% BPR, but the value attributable to the rental property is an excepted asset and does not qualify for relief.
Application to lifetime transfers and death
BPR applies to both lifetime transfers and transfers on death. For lifetime gifts, the donee must retain the property for the required period, or relief may be clawed back.
Agricultural Property Relief (APR)
APR is intended to keep farms and agricultural land in production by reducing or eliminating IHT on their agricultural value.
Key Term: Agricultural Property Relief (APR)
A relief that reduces the value of qualifying agricultural property for IHT, either by 100% or 50%, depending on occupation and ownership.
Qualifying property
APR applies to:
- Agricultural land or pasture in the UK, Channel Islands, Isle of Man, or EEA
- Farmhouses, cottages, and buildings of a character appropriate to the land
Key Term: agricultural value
The value the property would have if used only for agricultural purposes, ignoring any development or non-agricultural potential.
Rates of relief (APR)
- 100% relief: if the owner occupied the property for agricultural purposes for at least two years before transfer, or owned it for at least seven years and it was occupied by someone for agriculture
- 50% relief: for certain tenanted land or where the owner does not have the right to vacant possession
Occupation and ownership requirements
The property must have been:
- Occupied by the transferor for agricultural purposes for two years before transfer, or
- Owned by the transferor for seven years and occupied for agriculture throughout that period
Restrictions
APR does not apply to:
- Land used for non-agricultural purposes (e.g., development, sporting rights)
- Value above the agricultural value (e.g., development value)
- Farmhouses not of a character appropriate to the land
Worked Example 1.2
B owns a farm and farmhouse, which she lets to a tenant farmer. She has owned the property for eight years. The farmhouse is used by the tenant as their main residence.
Answer: The land and farmhouse qualify for 100% APR, as B has owned the property for at least seven years and it is occupied for agriculture.
Application to lifetime transfers and death (APR)
APR applies to both lifetime gifts and transfers on death. If the donee sells or ceases to use the property for agriculture within seven years, relief may be clawed back.
Interaction between BPR and APR
Sometimes both reliefs may be available, but APR takes priority. BPR may apply to any value not covered by APR (such as development value), provided the business requirements are met.
Worked Example 1.3
C owns land used for farming, but part of the value is due to hope value for future development. APR applies to the agricultural value, but not to the hope value.
Answer: APR is applied first to the agricultural value. If the business as a whole qualifies, BPR may be available on the excess value (hope value).
Technical requirements and anti-avoidance
Ownership and replacement property
The two-year (or seven-year) ownership period can include periods where the asset replaced other qualifying property, provided the combined period meets the requirement.
Reservation of benefit
If the donor continues to benefit from the property after a lifetime gift (e.g., continues to live in a farmhouse rent-free), the gift is treated as ineffective for IHT, and the property remains in the donor’s estate.
Key Term: gift with reservation of benefit
A gift where the donor retains some benefit from the property after the transfer, causing the asset to remain in the donor’s estate for IHT.
Anti-avoidance and clawback
If the donee sells or ceases to use the property for qualifying purposes within seven years of the transferor’s death, relief may be withdrawn.
Exam Warning
For SQE1, be careful to distinguish between the asset types and rates for BPR and APR. Always check the business is trading, not investment, and confirm the correct ownership period. Do not assume relief applies to the full market value—APR is limited to agricultural value.
Key Point Checklist
This article has covered the following key knowledge points:
- Business Property Relief (BPR) and Agricultural Property Relief (APR) can reduce or eliminate IHT on qualifying assets.
- BPR applies to trading businesses and certain business assets, at 100% or 50% depending on the asset.
- APR applies to agricultural land and buildings, at 100% or 50% depending on occupation and ownership.
- Both reliefs require a minimum ownership period (usually two years).
- APR is limited to agricultural value; BPR may apply to excess value if conditions are met.
- Reliefs can be clawed back if qualifying conditions are not maintained after transfer.
- Gifts with reservation of benefit are ineffective for IHT relief.
Key Terms and Concepts
- Business Property Relief (BPR)
- unquoted trading company
- trading business
- excepted asset
- Agricultural Property Relief (APR)
- agricultural value
- gift with reservation of benefit
