Business property relief (BPR) is one of the most valuable inheritance tax (IHT) reliefs available to business owners. However, advisers are often caught out by the seemingly strict requirement that qualifying assets must have been owned for at least two years before a transfer takes place.

In practice, the legislation contains several important exceptions that can preserve relief even where the ownership period has not been met.

Relevant business property

In practice, shares in owner-managed trading companies are one of the most common categories of relevant business property encountered by advisers.

However, the relief is not available where the company’s business consists wholly or mainly of making or holding investments. This means that property investment companies will generally fail to qualify.

Where the conditions are satisfied, relief is normally available at 100%, subject to the new £2.5m cap.

The two-year ownership requirement

IHTA 1984, s. 106 imposes a minimum ownership period. Broadly, property is not relevant business property unless it was owned throughout the two years immediately preceding the transfer.

This can create problems in a number of common situations, including:

• incorporation of an existing sole trade
• share reorganisations
• succession planning between spouses
• conversion of director’s loan accounts into shares.

Fortunately, the legislation contains a number of relieving provisions.

Replacement property

The first important exception is found in IHTA 1984, s. 107.

Where business property replaces other business property, the ownership periods can effectively be aggregated. Broadly, the replacement property can qualify if:

• the replacement property and the original property would both qualify as relevant business property; and
• together they have been owned for at least two years out of the previous five years.

This provision is particularly important on incorporation.

Example

James operated a successful engineering business as a sole trader for 15 years before incorporating it in 2025. In exchange for transferring the business to the company, he received ordinary shares.

In 2026, James wishes to transfer the shares into a discretionary trust as part of his estate planning.

At first glance, the shares have only been owned for one year and appear to fail the two-year test. However, the shares replaced the sole trade business, which itself constituted relevant business property. The combined ownership period therefore exceeds two years, meaning BPR can still apply.

This exception is often overlooked in practice, particularly where incorporation has occurred relatively recently.

Shares identified with other shares

A special extension to the replacement property provisions applies where shares can be ‘identified’ with other shares.

This typically arises on a qualifying reorganisation of share capital for CGT purposes under TCGA 1992, s. 126. Where the new shares are treated as the same asset as the old shares for CGT purposes, the BPR ownership history can also effectively carry across.

This distinction becomes particularly important when clients wish to convert director’s loan accounts into shares.

Director’s loan accounts and rights issues

Director’s loan accounts can present a significant IHT exposure.

While shares in a trading company may qualify for BPR, a loan made to the company generally will not. As a result, clients with substantial loan account balances will often consider capitalising those balances into shares.

However, the manner in which the shares are issued is critical.

Simple subscription trap

If new shares are simply subscribed for in exchange for the loan balance, those shares are treated as newly acquired assets with their own ownership period.

Example

Claire owns all the shares in a trading company and has a director’s loan account credit of £800,000.

The company issues further ordinary shares to Claire in exchange for the loan balance.

If this is structured as a simple subscription, the new shares will not qualify for BPR until they have been owned for two years. During that period, the value represented by those shares remains exposed to IHT.

The decision in Vinton (Executors of Dugan-Chapman dec’d) v R & C Commrs (2008) Sp C 666) serves as a useful reminder that relief can fail where reorganisations are not structured correctly.

Rights issues

The position can be improved if the shares are issued as part of a rights issue proportionate to the existing shareholdings.

Where the issue constitutes a reorganisation of share capital under TCGA 1992, s. 126, the new shares can identify with the original shares and inherit their ownership history. This means that BPR may apply immediately, without waiting a further two years.

For clients with large director’s loan balances, the structuring point can therefore be extremely valuable.

Successions on death

The second major exception is found in IHTA 1984, s. 108. Where a person becomes entitled to business property on a death, they are treated as owning the property from the date of death for the purposes of the two-year test.

This provision is particularly important during estate administration periods, where there may be a delay before assets are formally transferred to beneficiaries.

In addition, where the deceased was the transferee’s spouse or civil partner, the ownership period of the deceased can also be inherited.

This can significantly reduce the risk of relief being lost following a relatively recent inheritance.

Successive transfers

The third key exception is contained in IHTA 1984, s. 109. The rules apply where:

• there are successive transfers within two years of one another; and
• at least one of those transfers occurs on death.

Broadly, if the property qualified for BPR on the earlier transfer, it can continue to qualify on the later transfer even though the second owner has not held the property for two years.

Importantly, unlike the succession provisions, the death does not necessarily need to occur on the first transfer.

Example

Michael transfers qualifying shares in his trading company to his spouse, Sarah, during his lifetime.

Ordinarily, the spouse exemption means there is no need to consider BPR on the transfer itself.

However, both Michael and Sarah die unexpectedly within two years of the gift. Although Sarah has not owned the shares for two years, the successive transfers provisions can preserve BPR because the transfers occurred within the statutory period and one of them occurred on death.

Without these rules, significant IHT exposure could arise simply because of the timing of events.

Practical points for advisers

Several practical planning issues arise from these provisions.

Review recent incorporations. Clients who have recently incorporated long-standing businesses may wrongly assume they must wait two years before undertaking estate planning involving shares.

The replacement property provisions may allow immediate access to BPR. Consider the structure of share issues carefully. Where loan accounts are being capitalised, the distinction between a simple subscription and a rights issue can determine whether relief applies immediately or only after a further two-year period.

This should be considered before documentation is prepared.

Do not overlook non-share assets. While shares are the most common form of relevant business property, advisers should also consider business interests and partnership assets when reviewing replacement property provisions.

Estate planning between spouses. Clients may assume that gifts between spouses are entirely risk-free because of the spouse exemption. However, where death follows unexpectedly soon after the transfer, the interaction between the spouse exemption and BPR can become important.

The successive transfers rules can provide valuable protection in these circumstances.

This article was supplied by Croner-i. Find out more.