IHT: BPR and ‘excepted assets’

An ‘excepted’ asset for inheritance tax (IHT) business property relief (BPR) purposes is defined within IHTA 1984, s 112 as follows:

‘(2) An asset is an excepted asset in relation to any relevant business property if it was neither—

(a) used wholly or mainly for the purposes of the business concerned throughout the whole or the last two years of the relevant period defined in subsection (5) below, nor

(b) required at the time of the transfer for future use for those purposes.’

‘(5) For the purposes of this section the relevant period, in relation to any asset, is the period immediately preceding the transfer of value during which the asset was owned by the transferor or, if the business concerned is that of a company, was owned by that company or any other company which immediately before the transfer of value was a member of the same group.’

This provision relates to what qualifies as ‘relevant business property’ for BPR purposes. From 6 April 2026, 100% BPR for such property is limited to £2.5m per individual and trust, with a 50% rate of relief for value thereafter.

When considering making a claim for BPR, the value of any asset which has not been used in the business over the last two years, nor will be used in the future, is simply disregarded. For example, if a business is worth £2m and there is £100,000 worth of excepted assets, then only £1.9m will qualify for BPR purposes. There is both an ‘historic test’ and a ‘future use test’.

What sort of assets might be deemed as excepted assets?

An obvious category of assets which might be considered as excepted are those used for private purposes by the business owner (e.g., a house used as a personal residence); but a more common
example is ‘surplus’ cash. Working capital sits within a current account and is usually earmarked for future use in expanding the business and thus will always be a business asset. But if cash is simply sitting in a savings account or bond, with no plans for its use in the business, with few additions or withdrawals, then it is possible that this cash might be regarded as surplus to requirements and thus an excepted asset with no historic or future business use in sight.

HMRC’s Shares and Assets Valuation Manual (at SVM111220) considers some of the factors which might help determine whether cash is surplus:

• ‘Was the cash used for the business?
• Was the cash used to finance the business carried on by the company?
• How much cash did the company use regularly?
• What were its short-term cash requirements?
• Does the amount of cash fluctuate?’

Are investment assets held within a business automatically ‘excepted’?

Not necessarily. If the business is trading and the investment has nothing to do with that trade, then yes, it would likely be regarded as such.

However, if the business is a single ‘blended’ one with the investment assets forming an integral part rather than representing a completely separate business, then under the principles outlined in Farmer & Giles (Farmer’s Executors) v CIR [1999] SpC 216 and reinforced in HMRC v AM Brander (Earl of Balfour’s Personal Representative) [2010] UKUT 300 (TC), BPR is available on the business as a whole, broadly as long as it is more trading than not. There might be some argument from HMRC that the investments represent a separate investment business, the value of which will not qualify; alternatively, if it is one business but the majority is represented by the investments, there is a risk that the whole business might not qualify for relief.

Practical tip

If the potentially excepted asset can be integrated into a largely trading business, this should still allow for the application of BPR for that asset; ideally, surplus cash should either be brought into use as working capital or withdrawn from the business.

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.