After UK tax changes due to apply after 6 April 2026, family business owners will have their ownership subject to inheritance tax for the first time. That’s because business property relief (BPR) is to be restricted.
When they have invested their life savings and built up a business over a lifetime, most business owners want to pass it onto the next generation to carry on the business as tax efficiently as possible. However, changes to the UK tax regime outlined in the October 2024 budget introduce major changes which will affect many business owners.
UK businesses have traditionally benefited from zero IHT liabilities when owners pass on a business to their heirs. But, after April 2026 this will no longer apply as Business Property Relief (BPR) is to be restricted.
This article applies primarily to England and is not a full interpretation of HMRC rules. Always seek professional advice before making or not making decisions. Use this guide as the starting point for your research, not an endpoint.
It has long been a sore point with buy-to-let investors that HMRC views these “businesses” as investments, not trading businesses. Therefore, unless under rare circumstances, they attract no BPR and are taxed at 40 per cent. This is the case whether the property business is owed personally, as part of a partnership or by a limited company.
With trading businesses, property or any other types, the business will benefit from BPR so long as most of its activity is seen as trading rather than investing. In fact, there is danger in investing activities within an incorporated trading business as BPR could be lost.
For holiday let businesses, as with a buy-to-let business, the key factor is whether they qualify as a trading business rather than an investment business. Historically, HMRC has scrutinised holiday lets to determine if they meet the criteria for BPR, often requiring evidence of substantial services beyond simple property rental.
A technical consultation on APR and BPR was undertaken by HMRC 2025 earlier this year which will provide further details of the changes in the IHT regime. If you own a holiday let business, it may be worth reviewing its structure and operations to ensure it qualifies under the new rules when the draft legislation is published in July.
From 6 April 2026, Business Property Relief (BPR) will be capped at £1 million per individual for qualifying business and agricultural assets combined. This means that for any trading business, sole trader, partnership or incorporated trading business, and property businesses such as qualifying holiday let businesses, the first £1 million of qualifying assets owned by an individual will continue to receive 100% relief from Inheritance Tax (IHT).
However, any value above this threshold will only qualify for 50% relief, effectively subjecting the excess to a 20% IHT rate, assuming the individual’s nil-rate band has been fully utilised.
It's important to note that few buy-to-let businesses would qualify for BPR. To be eligible, the business must be a genuine trading entity, not merely holding investments. HMRC typically views passive property rental activities as investment businesses, which do not qualify for BPR. However, if the business provides substantial additional services—such as genuine furnished holiday lettings or property management—it may be possible to convince HMRC that it is a trading business and thus eligible for BPR.
These changes are part of the government's broader efforts to reform inheritance tax reliefs, aiming to raise additional revenue for public services and address perceived inequalities in the tax system and the economy. HMRC claim they will impact a relatively small number of estates, primarily those with significant business or agricultural assets, otherers disagree.
Managing Director of a substantial Manchester based pub chain and brewery, JW Lees Brewery, has been a high-profile campaigner against the introduction of restrictions on BPR. It is a new tax on business ownership that he says, as yet many business owners are blissfully unaware.
He has written a number of articles about Business Property Relief (BPR), reminding politicians that family businesses are responsible for 25% of all private sector jobs and that the BPR tax changes will mean that any shareholding worth more than £1m in a family business will now be taxed on death at 20 per cent, rather than being free of tax for family beneficiaries.
He reminds us that many business owners are still unaware of the change and the results of CBI research finding that the imposition of the extra tax will result in a reduced tax take overall of £1.9bn per year
That’s because, they argue, these changes will create forced sellers of family businesses, not to mention the stalled new investment in these businesses and the time, effort and costs those directors and owners will spend focussing on tax planning with their accountants and lawyers.
Mr Lees-Jones gives the example of a business worth £2m that makes £50k profit per year being left with a tax liability of 20% of £1m. So, £200,000 is needed to be found to pay the tax. HMRC allows this to be paid interest-free over 10 years, but it then means the exchequer takes 40 per cent of the profits of the company over the next 10 years
He argues this will lead to less investment, less jobs and potentially the sale of the business since it takes a lot of risk and work to create £50k profit and it may not be worth it for the £30k that's left he says.
In the short term he says, there’s evidence that all family businesses are putting investments on hold. That’s not good but the longer-term impact will be changes in family company ownership.
Private equity (PE) ownership, says Mr Lees-Jones is normally 5-10 years, often turning a company around and selling off its non-core assets. Many companies benefit from the ruthless and focused involvement of PE, but PE is often overseas ownership and so goodbye to UK taxes.
Family business ownership says Mr Lees-Jones is all about long term focus and building a business through generations. BPR has meant that family businesses have had an incentive to invest in their businesses over the last 50 years.
As soon as a family takes money out of the business, whether that’s in salaries or dividends then tax is paid but through BPR there's been a strong reason to invest as much as possible back in the business and that's been good for growth, he says.
A recent survey carried out by Family Business UK found that the number of family businesses taking action or inaction following the recent tax changes included:
Those taking legal advice
68%
Those pausing new investment
55%
Those deferring or reducing investment
41%
Those pausing new recruitment
23%
Those directors gifting shares away
16%
Those reducing donations to charities
15%
It's important to note that few buy-to-let businesses will qualify for BPR. To be eligible, the business must be a genuine trading entity, not merely holding investments. HMRC typically views “passive” property rental activities as investment businesses, which do not qualify for BPR.
However, if the business provides substantial additional services—such as furnished holiday lettings, AirBnB type businesses, short lets and serviced accommodation, or property management, it may be considered a trading business and thus eligible for BPR.
Company directors only face IHT on assets they personally own, such as shares in the company and loans owed to them by the company.
Given the complexity of these rules and their potential impact on estate planning, it's advisable to consult a qualified tax advisor or estate planner to assess how these changes may affect your specific situation but below are some tips on how to.
It is difficult but not impossible to successfully claim BPR eligibility for property businesses. Here is a suggested approach to show HMRC why you think you are eligible.
Have a business plan. A detailed business plan is useful for many situations in business. In the case of the property business eligibility, you must clearly outline the primary objective as providing a service as short-term serviced accommodation, not permanently renting out property.
A good detailed plan establishes the trading intent of the company from the outset. Your target market will be tourists and business travellers for example, and you need to detail the services provided (cleaning, maintenance, linen, customer support, etc.).
Document your staffing structure and your management responsibilities and maintain details of staff rotas, employment contracts, or third-party service agreements. Regularly update booking schedules (short durations, high turnover of guests), cleaning/service logs, and guest feedback on services (showing service-oriented activity).
Make sure your detailed accounts separate rental income and service income (e.g. cleaning, food, laundry, admin fees) and record and highlight staff costs, consumables, and service-related expenses. Use classifications that are aligned with Furnished Holiday Lettings or hotel-style accounting practices.
Document your marketing activities including website screenshots and booking portals (Airbnb, Booking.com, HolidayCottages.com etc.) and show your SEO strategies, and social media campaigns etc. Document and third-party marketing contracts or online platform management.
Show that your letting agreements are short term licences not long-term lets by keeping copies of these along with staff contracts and contractor service agreements. Insurance policies should also show they cover short-term guest-related risks (e.g. public liability).
Keep documentation to show you are complying with relevant regulations such as fire safety, CO monitoring, food handling, gas appliance and PAT testing etc.
Keep time logs to show the amount of time owners / directors spend on active management, guest contact and operational decision-making.
As an owner / partners / director of the property business you are building a case to show that this is not a passive business but one that requires substantial hand on management.
An independent valuation report for the business may be added to confirm that the goodwill in the business arises from services, not just property. In the case of a high value operation it may be cost effective to get a legal opinion stating the business meets trading thresholds for BPR.
All this information should be easily accessible to your executor/tax advisor/solicitor to be included with your estate documentation. HMRC is less likely to challenge well-documented claims.
The UK government announced significant changes to Business Property Relief (BPR) in its October 2024 Budget. This is due to take effect from April 6, 2026. Under the new rules, 100% relief will only apply to the first £1 million of qualifying assets, with any amount above this figure receiving 50% relief from Inheritance Tax.
BPR applies to genuine trading businesses. HMRC generally treats buy-to-let as an investment business, not a trading business, which means no BPR at all is available unless the owners / director / partner business or company is providing substantial services (e.g. serviced accommodation or furnished holiday lettings with hotel-like amenities).
Despite protests, so far the Government is pressing ahead with the changes to BPR and APR which, according to some economic commentators, on the face of it, they appear to directly oppose the Government’s stated aim of economic growth.
[main image credit: Kampus Production]
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