Business Property Relief (BPR) – How does it fit into your Financial Plan?

Mark Dodd - Holden & Partners staff member

Business Relief – it’s growing in popularity, but how might it help you?

Following changes announced in the Autumn 2024 Budget, we’ve noticed an upsurge of interest in Business Relief (BR) investments. Mark Dodd, Financial Planner and Partner at Holden & Partners, shares his expertise on this growing area, and we discuss who might benefit from BR investment strategies.

What is Business Relief?

Since its introduction in 1976, Business Relief (BR) has enabled the shares of a company held for two years or more to be passed to the next generation without incurring inheritance tax. The original aim was to allow family-owned businesses to continue without needing to be sold or broken up to pay tax.

However, times have changed, and BR is now frequently used to encourage investment in trading businesses, that are not family run. Investors are capitalising on this as part of their Inheritance Tax (IHT) planning, as it can offer a tax-efficient way to pass on intergenerational wealth, providing the qualifying assets have been held for two years at death.

BR provides an attractive option, with 100% relief from IHT on qualifying assets valued at up to £1 million per investor. Anything over this threshold attracts relief of 50%. Even being a minority shareholder in a qualifying business, or portfolio of businesses, is enough to benefit.

Why is Business Relief rising in popularity?

Mark Dodd explains, “We’ve had more interest in BR as a wealth management approach recently. That’s because of the changes announced in the Autumn 2024 Budget, with IHT allowances to be kept at current levels until 2030, and unspent pensions now being included as part of a person’s estate from April 2027. This will increase the IHT liability for many people. Using BR can offer another IHT solution as part of a range of options.”

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Who could benefit from a BR strategy

“This isn’t a first line of defence,” Mark cautions, “In fact, you want to have exhausted all other options before you get to this one.”
Other approaches to consider first are using up your ISA and pension allowances, gifting large sums of money and setting up trusts. Whilst BR assets are not the most effective method to diversify your investment portfolio risk, due to the underlying nature of the investments, they can sit alongside these options to maximise your overall tax-efficiency and diversification.

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Benefits of BR
  • BR assets are a tax-efficient option, bringing 100% relief up to £1 million and 50% thereafter.
  • BR works fast. The qualifying asset only needs to be held for two years at death to achieve full relief. Other IHT planning options such as Trusts, or financial gifts take seven years before benefiting from full relief.
  • The BR shares can be passed on death to a spouse or civil partnership, as well as children and the previous period of ownership counts for the new owner.
  • Unlike gifting or setting up trusts, it enables the holder to retain ownership and control of the asset until death. It can still be accessed if required, to supplement income, for example.
  • There is much less admin compared to setting up Trusts, which bring complicated processes and tax reporting responsibilities.
  • BR encourages the support and growth of small businesses, so can play a key role in a healthy economy.
  • BR assets can offer sustainable options, such as investing in renewable energy or forestry.
Risks of BR
  • Small businesses are by their nature risky, there is no guarantee that your capital is safe – you could lose some or all of your money.
  • Growth rates are unlikely to be as high as other investment options.
  • If the holder dies before the two years has elapsed, the tax advantages are lost. However, with some providers, there are life assurance solutions that can mitigate this.
  • BR-qualifying shares are harder to liquidate than ISAs or other investments, so should only be considered as a long-term option.
  • If the surviving spouse has already used their full BR qualifying amount, then it can’t be passed to them with BR applying. A more sensible strategy in this situation to avoid paying inheritance tax would be to pass the BR investment through your Will directly to the next generation.
  • With any tax-related approach over the medium or long-term, there is always the risk of changes to tax laws that could reduce or remove the benefits, as was seen with pension death benefits in the October Budget.

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The Holden & Partners’ approach

Mark explains, “We can support clients who would like to explore BR options. We’d discuss your overall estate planning objectives and work out if using BR would be a helpful part of the strategy, once all other allowances are made use of.”

Our advisers help you understand the risks and benefits of a BR approach and take measures to mitigate the risks. Whilst not a rigid rule, this could for example include ensuring there is no more than 5% of your investable assets in any one BR product, and no more than 20% of your overall wealth in BR, so that you are protected from over-exposure to higher risk investments, where this might not be appropriate.

Avoiding an over-weight exposure to one provider really helps manage the risks too. We’d also discuss the option of including life assurance to cover the tax bill if the two years qualifying period was not met.

As with all things financial, taking the long-term view and planning for the future is always the best strategy. We can help you with your IHT planning and make sure you are on track to meet your goals.