Business Relief for Inheritance Tax Explained

Business Relief is an inheritance tax relief that reduces the value of qualifying business assets when working out how much inheritance tax is due — either on death or on certain lifetime transfers. Inheritance tax is normally charged at 40% on the value of an estate above the available allowances, so relief on business assets can make a substantial difference.

The relief is available at two rates: 100%, which removes the value of the qualifying asset from the inheritance tax calculation entirely, and 50%, which halves the value that counts. Which rate applies depends on the type of asset. The relief has existed in broadly its current form since 1992 and was designed so that family businesses and farms would not have to be broken up or sold simply to pay an inheritance tax bill.

A key condition is ownership time: in most cases you must have owned the business asset for at least two years before it is transferred for it to qualify. The business must also be a genuine trading business rather than one that mainly holds investments.

Broadly, 100% relief has traditionally applied to a business or an interest in a business (such as a sole trade or a share in a partnership) and to shares in an unlisted trading company. 50% relief has applied to certain other assets, such as land, buildings or machinery owned personally but used in a business you control, and to controlling shareholdings in fully listed companies.

Some assets do not qualify at all. Businesses that consist wholly or mainly of dealing in securities, stocks or shares, land or buildings, or making or holding investments, are generally excluded. A buy-to-let property business, for instance, would not normally qualify because it is treated as an investment rather than a trade. This trading-versus-investment distinction is central, and the boundaries can be complex, so it is an area where professional advice is often valuable.

The most significant change is the introduction of a cap on 100% relief. From 6 April 2026, full 100% relief applies only to the first £2.5 million of qualifying business and agricultural property combined. Above that £2.5 million allowance, relief is given at 50% on the excess — meaning an effective inheritance tax rate of 20% on the value above the allowance.

The £2.5 million allowance is per person. Importantly, any unused portion can be transferred to a surviving spouse or civil partner, in a similar way to the nil-rate band. According to HMRC, combined with the nil-rate bands this means a married couple or civil partners could potentially pass on up to £5.65 million in qualifying assets and allowances tax-free between them. The allowance will rise in line with the Consumer Prices Index from 6 April 2031.

There is also a practical easing alongside the changes: the option to pay inheritance tax in ten equal annual instalments, interest-free, has been extended to all property that qualifies for Business Relief, which can help where assets are not easily turned into cash.

A second important change affects shares that are "not listed" on a recognised stock exchange — most notably shares quoted on the Alternative Investment Market (AIM). Before April 2026 these typically attracted 100% Business Relief. From 6 April 2026 the rate of relief on such shares is reduced to 50% in all cases.

These shares also sit outside the £2.5 million allowance — they do not use it up, but nor do they benefit from the 100% rate. In practical terms, an AIM portfolio held for IHT planning will now leave half of its value within the estate for inheritance tax purposes. Anyone who has used AIM shares as part of their estate planning may wish to review whether that approach still suits their goals.

Business Relief does not replace the standard inheritance tax allowances — it works alongside them. Every estate still has the nil-rate band of £325,000, and many also have the residence nil-rate band of up to £175,000 where a home is passed to direct descendants. Transfers between spouses and civil partners remain exempt from inheritance tax under the spouse exemption. Business Relief reduces the taxable value of qualifying business assets before these allowances and the 40% rate are applied to the rest of the estate.

Because the interaction between these reliefs and the new cap can be intricate, and because the qualifying conditions are detailed, this is an area where regulated advice and specialist estate planning are often appropriate.