Inheritance tax reforms will hit property businesses too...

Why do Rachel Reeve’s inheritance tax reforms affect property businesses owners — and what can they do about it?

Tom Entwistle discusses the issues around IHT for property businesses.

Inheritance tax (IHT) has always been an unpopular tax, many seeing it as double taxation. But rarely has it been as disruptive to long-term business planning as it is now following the Autumn Budget reforms in 2024. 

From April 2026, the reforms to Agricultural Property Relief (APR) and Business Property Relief (BPR) represent the most significant tightening of succession planning reliefs in decades. 

While there’s been a small concession in the Chancellor’s recent (Autumn Budget 2025) regarding transfers between spouses, this only fiddles around the edges and does not alter the underlying reality: the UK is now taxing inter-generational business continuity more heavily than ever, and property businesses are firmly in the firing line.

For landlords, property entrepreneurs, farmers and company owners, the question of IHT liabilities is not an abstract policy debate. The changes go directly to the heart of whether otherwise viable, tax-paying businesses survive a generational handover — or are forced to sell assets, downsize or close altogether.

This article applies primarily to England & Wales and is not a full interpretation of HMRC rules, which are subject to regular changes. Always seek professional advice before making or not making decisions. Use this guide as the starting point for your research, not an endpoint.

What is inheritance tax, APR and BPR?

Inheritance tax (IHT) is charged to individuals at 40 per cent on estates above the available nil-rate bands. For most families, that means a standard nil-rate band of £325,000 per person, plus a residence nil-rate band of up to £175,000 when a main home passes to direct descendants. Transfers between spouses remain exempt, and unused nil-rate bands can be passed to the survivor.

APR and BPR sit outside this framework. They were introduced for a clear economic reason: to prevent productive businesses and farms being broken up simply to pay a tax bill on death. Where the conditions are met, these reliefs reduce the taxable value of qualifying assets by either 50 per cent or 100 per cent.

BPR applies to shares in unquoted trading companies (mainly private limited companies), interests in trading partnerships and certain business assets used by a company or partnership.

But unfortunately, for property investors in buy-to-lets, for example, it does not apply to these types of operations, businesses that are mainly investment-based. HMRC sees a distinction between trading versus investment as a business activity, and it consistently takes a narrow view on this.

What changes from April 2026?

Until now, APR and BPR were uncapped. A qualifying family business worth £3 million or £30 million could, in principle, pass to the next generation free of inheritance tax.

But after Reeve’s 2024 Budget, and from 6 April 2026, that changed fundamentally. The government is introducing a combined £1 million cap per individual on assets qualifying for 100 per cent APR or BPR. 

Anything above that threshold will attract only 50 per cent relief, with the remaining value exposed to inheritance tax at the usual rate. In simple terms, the effective tax shield for business assets is being cut — sharply — for anyone with a successful, growing enterprise.

For example, because farm income is typically low compared to the high capital value needed to produce it, a viable farm today typically needs 500 acres. With machinery and buildings they typically would be totalling at least £5 million. So, even when the APR surplus is taxed at the concession rate of 20 per cent, the liability can be crippling to the future of the business. Similarly, with BPR liability on trading businesses.

The latest spousal transfer concession helps, but is largely cosmetic

Following repeated objections and sustained pressure from business groups, the Treasury has now conceded (in the latest 2025 Budget) that unused APR and BPR allowances can be transferable between spouses and civil partners. In practice, this means that on second death a couple can potentially shelter up to £2 million of qualifying business assets at 100 per cent IHT relief.

This was presented as a significant concession but in reality it is nothing more than damage limitation for viable businesses of any size. Aligning APR and BPR with the long-established treatment of the nil-rate band transfer simply corrects an obvious inconsistency created by the 2024 proposal.

Crucially, it does nothing to address the core design flaw of the reforms: the imposition of an arbitrary cap on relief that bears no relationship to business size, capital intensity, or the potential economic contribution to the UK economy a viable business will have in the future. 

For qualifying capital intensive property businesses - or any other business for that matter - that have grown organically over decades, £2 million is not an indicator of exceptional wealth, it is often the minimum size required to operate efficiently.

How do the numbers stack up?

Consider as an example, a married couple running a qualifying property-based trading business worth £4 million. Under the new rules, assuming full use of transferable allowances, potentially:

• £2 million qualifies for 100 per cent BPR
• The remaining £2 million qualifies at 50 per cent relief
• £1 million would therefore remain exposed to inheritance tax
• At 40 per cent, the IHT bill is £400,000

For families, the difficulty is this liability arises at precisely the moment when the business is dealing with bereavement, succession, management transition and perhaps the need for refinancing. For many family-run operations, that amount of cash simply is not available without selling assets or winding up the business.

Inheritance Tax (IHT) on those assets that do not qualify for full Business Property Relief (BPR) is generally due by the end of the sixth month after the person died, with interest due on late payments. But a key concession for qualifying business assets is the option to pay the IHT liability in ten equal annual instalments, interest-free.

Even with this concession, for many businesses, typically farms with low incomes, the concession is insufficient to ward off major cash-flow problems.

Property businesses and the BPR problem

This is where BPR is an often misunderstood concession when applied to property businesses. Whether that’s a typical owner occupation buy-to-let business or a similar property business operated within a limited company, there is much confusion.

Most buy-to-let businesses are treated by HMRC as investment businesses for inheritance tax purposes. Simply owning and letting property — even on a large scale — is rarely sufficient to qualify for BPR. HMRC looks for a high level of additional services (activities), or active management and trading-style activity.

As a result, a conventional buy-to-let portfolio will usually fall outside BPR altogether whereas a furnished holiday let operation may qualify. But there’s no guarantee, and it may only qualify where the trading case is strong. Property development companies that are actively trading can usually qualify, but only where development activity is ongoing and genuine.

In other words, many property business owners face the worst of both worlds: they are in capital-intensive businesses with rising asset values. These, coupled with their private wealth (main home and investments), will push their estates well over the IHT threshold. And they have limited access to those reliefs designed to protect businesses from succession issues.

A real sense of unfairness 

It could be argued that a sense of unfairness here is not just emotional, it’s based on substance, it’s structural.

Inheritance tax is applied after a lifetime of paying tax on the property operation: income tax, corporation tax, dividend tax, stamp duty land tax, VAT on services, and employer costs. Property businesses are capital-intensive, long-term and often illiquid, yet the tax system continues to treat them as if assets can be sold instantly and with no economic consequence.

The new APR/BPR cap introduces a blunt, one-size-fits-all ceiling that disproportionately hits exactly the type of mid-sized, successful family business that the government claims to support. They help grow the UK economy. A business valued at £900,000 gets full protection whereas one worth £3 million is treated as a cash-cow for the treasury. 

Is this principled and sensible tax design or is it simply short-term thinking - revenue-driven policymaking - that ignores how real businesses function and how they benefit the economy long-term.

The economic consequences are real

The Treasury’s assumption that these (2024) reforms will raise revenue without materially altering behaviour is palpably flawed and already proving to be false.

Advisers across the property, farming and SME sectors report clients actively changing their behaviour, changing investment plans and generally cutting back. What’s more, accountants and solicitors have already had a field day advising clients on IHT succession issues. 

Since that Budget, many owners have switched their main focus of attention from how to efficiently run and expand their business, to how best to avoid the tax. Since October 2024 they have been:

• Scaling back expansion plans
• Delaying or cancelling development projects
• Holding excess cash rather than reinvesting it
• Selling properties or entire businesses earlier than originally planned
• Structuring their business defensively for tax planning rather than for growth

These responses are natural and rational. Faced with a future inheritance tax cliff edge, business owners do what the policy environment encourages them to do, they reduce their exposure to the tax.

The irony is obvious and therefore it’s difficult to understand the Treasury’s motivation in applying changes that produce a relatively small amount of tax take. Its gain is simply a “rounding error” on the scale of total tax revenue, but a massive disincentive to the growth of small to medium size (SME) enterprises.

These government policies were sold as a way of taxing wealth more fairly. But reducing inequality in this way risks shrinking the very businesses that generate employment, productivity and future tax receipts. Over time, that undermines the tax base the Treasury is so desperately trying to protect and diminishes the overall tax take.

How can property business owners mitigate IHT?

The uncomfortable truth is that there is no silver bullet. But there are strategies that can reduce exposure if implemented early, most notably to the 7-year rule. But as one sage put it, do you trust your relatives more than you hate HMRC?

Where possible, you should review whether your activities come close to and are genuinely amounting to trading. Adding additional services, active management and operational intensity all matter but often they are not enough unless they amount to at least 50 per cent of the investment activity — they must be commercial and defensible, not cosmetic.

"Wholly or Mainly" is the business to investment test. The central issue here is that to qualify for BPR, a business must be a trading business, and not one that consists "wholly or mainly" (meaning more than 50%) of investment activities. Letting property is classified by HMRC as an investment activity.

BPR relief is designed to protect genuine trading businesses (e.g., manufacturing, retail, farming, property trading and development) so they can survive the owner's death without having to be sold to cover IHT bills. 

A buy-to-let business, even if it is a full-time occupation for the owner/s, or is run as an incorporated business (limited company), is seen as exploiting land for profit rather than as an active trading business, in the way that HMRC defines it.

There is much case law on this subject which shows that HMRC takes a hard line on property and BPR. It is grounded in repeated tribunal and court decisions, most of which landlords lose. Here are some test cases:

Ramsay v HMRC (2013) where a large buy-to-let business argued that the scale of activity and personal involvement amounted to trading, originally denied but the landlord won on appeal.

McCall v HMRC (2009) where a holiday let business with some additional services failed the BPR test. The court ruled that the services were ancillary to letting property, not evidence of a separate trade.

Pawson v HMRC (2013) an oft cited by HMRC. A furnished holiday let business was denied BPR despite high activity levels. The tribunal held that the business was mainly one of holding property and receiving rent.

George v HMRC (2014) A rare success for the landlord who argued successfully the level of services provided went far beyond passive letting, tipping the balance into trading. This case illustrates just how high this bar is.

Lifetime gifting

Transferring assets during your lifetime, rather than on death, remains one of the most tax efficient and effective tools. Known as “potentially exempt transfers”. They work well provided the seven-year rules are respected and the owner survives that long. The issue for many families though is that elderly owners may not live that long, hence this sort of tax planning needs to be done early. 

This, along with family investment companies and gradual succession planning can all reduce the eventual IHT bill, but get professional advice before making any changes.

The core test in trading versus investment

At the heart of getting BPR relief for a property company is a simple but unforgiving truth: trading businesses may qualify, investment businesses do not. Size alone doesn’t make a difference.

With conventional buy to let portfolios for most buy to let landlords, the position is not convertible. Granting leases, collecting rent, carrying out repairs and maintenance and engaging letting agents or self-managing are simply insufficient activity for BPR purposes. Even where management is full-time HMRC typically argues that these activities are incidental to property ownership and not evidence of trading.

As a result, standard buy to let businesses will rarely qualify for BPR, whether held personally, through a partnership or inside a limited company.

Furnished holiday lets (FHLs)

Furnished holiday lets fall into a “grey” area, neither fish nor fowl, and the bar is high. To stand any chance of qualifying for BPR, a FHL operation must demonstrate:

• Short term occupancy

• A high level of guest services

• Active, day to day involvement

• An operational intensity that’s akin to a hospitality business

Cleaning, linen changes, guest communication and marketing are relevant, but would not be decisive on their own. HMRC looks at the business picture as a whole. Even then, qualification is not guaranteed, and future legislative changes to the tax treatment of holiday lets add to further uncertainty in this area.

A property development business

Genuine property development businesses are more likely to qualify for BPR but only if development activity is regular and ongoing.

Here we are talking about a company that buys land or property to develop or refurbish units. It typically sells completed units as part of a continuing trade and thus will normally be regarded as trading.

However, problems might arise if the developed properties are retained for letting long-term, where trading activity slows or ceases and where the business drifts from development into investment. At that point, BPR could be lost entirely.

The mixed business 

Many property businesses are mixed, part trading, part investment and here HMRC will assess whether the main activity is trading, where ostensibly the 50 per cent rule might apply. If investment activity predominates, the entire business can be excluded from BPR, but even when a trading element exists there is no guarantee that HMRC accepts it for BPR.

Incorporation is no answer

Holding property inside a limited company does not, by itself, improve BPR eligibility. HMRC will look at the structure to determine the underlying activity. A company that exists to hold rental property is still an investment company, no matter how professionally it is run.

However, for incorporated businesses, careful structuring can help separate trading and investment activities. This can preserve BPR where it legitimately applies, and more generally life insurance written in trust can provide liquidity to meet an IHT bill without forcing asset sales. Not so elegant, but it is often a practical solution.

With transferable allowances now crucial, wills are an important part of the mix – they need to be reviewed with IHT reliefs in mind. Poor will drafting can easily waste valuable reliefs.

In summary

The spousal transfer concession introduced in the 2025 Budget was a useful one but far from a rethink on IHT. The APR and BPR reforms represent a clear shift away from supporting long-term business continuity towards maximising short-term revenue, however small the contribution this makes to the overall tax-take.

For property businesses, already contending with higher taxes on revenues, and extensive regulatory changes, higher financing costs and a seeming political hostility, this just sends a signal that growing businesses, success and business longevity, are increasingly being penalised rather than encouraged under the present regime.

If the UK government is serious about growth, investment and stable tax receipts, it would certainly re-think its IHT policy to facilitate orderly succession, and long-term ownership. 

Instead, current policy discourages investment, increases the likelihood of forced sales on death and fragments otherwise viable tax paying businesses that help grow the economy. 

These measures raise a paltry “rounding error” amount of tax when taken in proportion to the total tax take, but they have the effect of demoralising business owners and discouraging economic growth.

[Main imanage credit: Mikhail Nilov]