The devil in the detail

Business property relief (BPR) is a valuable inheritance tax (IHT) relief, despite the restriction in relief at the 100% rate to the first £2.5m of an individual’s relevant business property from 6 April 2026. Above that threshold, the BPR rate reduces to 50%. However, any unused 100% relief allowance can be transferred to a spouse or civil partner.

The ‘binding contract’ trap

In owner-managed companies and partnerships, it is not uncommon for the director shareholders or partners to have an agreement in place, which specifies what happens to the shares or partnership interest of a business owner who dies before retirement. The availability of BPR is subject to various conditions, including an anti-avoidance rule regarding ‘contracts for sale’ (IHTA 1984, s 113). This provision generally denies BPR if there is a ‘binding contract’ for the sale of relevant business property at the time of the transfer (including on death).However, this BPR trap is subject to two statutory exceptions:

• business incorporations where the binding contract is for the sale of a business (or business interest) to a company which is to carry on that business, and the consideration is wholly or mainly the company’s shares or securities (but not cash); or
• sales of company shares or securities for the purpose of reconstruction or amalgamation. Shareholder or partnership agreements can sometimes inadvertently result in the loss of BPR because of this rule.

What is caught?

For example, HM Revenue and Customs (HMRC) consider that a ‘buy and sell’ agreement constitutes a binding contract for sale, broadly where an arrangement provides for:

• an agreement for the shares or partnership interest to pass to the personal representatives (PRs) of the deceased shareholder or partner;
• a requirement for the PRs to sell the shares or partnership interest to the surviving partners or shareholders; and
• an obligation for the surviving partners or shareholders to buy the asset under the terms of the agreement. Where these conditions apply, BPR will not be due on the shares or partnership interest.

Can BPR loss be prevented?

However, HMRC seemingly accepts that agreements can be structured in such a way that BPR remains available, such as by adopting the following arrangements (see HMRC’s Inheritance Tax Manual at IHTM25292):

• Accruer clauses – whereby the deceased’s interest passes to the surviving business owners, who are required to pay the PRs a particular price (commonly an arm’s-length valuation).
• Options – the deceased’s business interest falls into his estate, but with an option for the survivors to purchase it.

For a company, if its Articles require the deceased shareholder’s personal representatives to offer his shares for sale to the company, other shareholders or directors, the BPR binding contract restriction does not apply provided there is no obligation on the survivors, etc to buy the shares (see HMRC’s Shares and Assets Valuation Manual at SVM111120). However, care is needed to ensure that there is no mutual obligation to do so.

Practical tip

HMRC is likely to investigate BPR cases where chargeable gifts of business property (e.g., shares) are made shortly before a sale (see IHTM25291). For example, if a chargeable lifetime transfer of shares (on which BPR is claimed) is followed shortly afterwards by a sale of the business, the BPR position will be ‘carefully checked’ by HMRC to see if there was a binding contract for sale at the date of transfer, such that BPR will generally be denied.

Disclaimer: The information provided on AccountingFirms.co.uk is for general informational purposes only and should not be considered professional accounting, tax, or legal advice. Always consult a qualified accountant or tax adviser for advice tailored to your individual circumstances.