Inheritance Tax and Business Relief

What Is Inheritance Tax?

Inheritance Tax (IHT) is a tax on the estate (property, money, and possessions) of someone who has died. It may also apply to certain gifts made during a person’s lifetime. IHT is governed by the Inheritance Tax Act 1984 and administered by HMRC.

IHT is charged at 40% on the value of the estate above the nil-rate band. However, numerous exemptions and reliefs can significantly reduce or eliminate the tax.

The Nil-Rate Band

Every individual has a nil-rate band (NRB) — a tax-free threshold below which no IHT is charged:

The NRB has been frozen at £325,000 since 2009 and is currently frozen until at least April 2028.

Transferable Nil-Rate Band

If a spouse or civil partner dies without using their full NRB, the unused portion can be transferred to the surviving partner’s estate. This means a surviving spouse can potentially have a combined NRB of £650,000.

The transfer is claimed by the executors of the second estate and applies regardless of when the first spouse died.

Residence Nil-Rate Band

An additional Residence Nil-Rate Band (RNRB) is available when a home is passed to direct descendants (children, grandchildren, step-children):

The RNRB is also transferable between spouses, giving a potential combined threshold of £350,000.

Combined Thresholds

The RNRB is tapered for estates over £2 million — it is reduced by £1 for every £2 of estate value above £2 million, disappearing entirely at £2.35 million (for individuals) or £2.7 million (for couples).

IHT Rates

The reduced 36% rate applies if the deceased left at least 10% of their net estate to qualifying charities.

Lifetime Gifts

IHT also applies to certain gifts made during your lifetime:

Potentially Exempt Transfers (PETs)

Gifts to individuals are potentially exempt — they become fully exempt if the donor survives for 7 years after making the gift. If the donor dies within 7 years, the gift is added back to the estate and taxed.

Taper relief reduces the IHT on PETs based on how long before death the gift was made:

Chargeable Lifetime Transfers

Gifts into certain trusts are chargeable lifetime transfers, taxed at 20% on the value above the NRB when the gift is made (or 40% if the donor dies within 7 years).

Annual Exemptions

Several exemptions reduce lifetime IHT liability:

Business Relief

Business Relief (BR) — formerly known as Business Property Relief — reduces the IHT value of qualifying business assets:

Qualifying Conditions

To qualify for Business Relief:

• The asset must have been owned for at least 2 years before the transfer
• The business must be a trading business — mainly (more than 50%) trading rather than investment
• The business must not consist wholly or mainly of holding investments, land, or dealing in securities

What Does Not Qualify

• Investment companies — companies whose main activity is holding investments
• Property investment businesses — buy-to-let portfolios and property holding companies
• Cash and investments held within a trading business that are not needed for the trade (known as excepted assets)

Business Relief and Company Shares

For directors and shareholders of private limited companies , Business Relief can eliminate IHT on the value of their shareholding, provided the company is a genuine trading company. This is one of the most valuable IHT reliefs available.

Shares listed on the Alternative Investment Market (AIM) also qualify for 100% BR, making AIM shares a popular IHT planning tool.

Agricultural Relief

Agricultural Relief works similarly to Business Relief and applies to the agricultural value of agricultural property:

The property must have been occupied for agricultural purposes for at least 2 years (if occupied by the owner) or 7 years (if let to a tenant).

Payment of IHT

When Is IHT Due?

IHT is normally due 6 months after the end of the month in which the death occurred. For deaths on 15 March, IHT is due by 30 September.

Payment by Instalments

IHT on certain assets can be paid in 10 equal annual instalments:

• Land and buildings
• Shares giving control of a company
• Unquoted shares (subject to conditions)
• Business assets

Interest is charged on outstanding instalments (except on land and buildings where the interest-free instalment option may apply in some circumstances).

Reporting

The estate’s personal representatives must file an IHT400 form with HMRC if:

• The estate is above the IHT threshold
• Certain reliefs or exemptions are being claimed
• The estate includes certain assets (such as trusts or foreign property)

Estates below the threshold that qualify for the excepted estates rules can use the simpler process through the probate application.

IHT and Your Tax Position

IHT is separate from income tax , corporation tax , and Capital Gains Tax , but they can interact:

• Assets receive a CGT-free uplift to market value on death — the inheritor’s base cost is the value at death
• Where Business Relief reduces the IHT value to nil, the CGT base cost is still the market value
• Lifetime gifts that are PETs may trigger CGT at the time of the gift (though hold-over relief may be available for business assets)
• Self-assessment obligations for the deceased’s final tax year still apply

Maintaining thorough accounting records and up-to-date business valuations helps executors manage the IHT process and claim reliefs accurately.