Mark Brownridge, Strategic Relations Director, discusses the evolution of Business Relief over 49 years and why it's so important for tax planning with clients.
1976! What a year!! Both Apple and Microsoft were incorporated, America celebrated its 200th birthday and Bohemian Rhapsody was at Number 1. Two other perhaps less noteworthy things happened that year. Firstly, I was born! (yes, I know, I cant be that old surely, thank you, very kind) and secondly, Business Relief was born.
Business Relief has arguably survived the intervening 49 years better than I have. Not many Government tax initiative schemes survive such a long period of time largely intact through various changes in Government and political and economic ideologies.
So, why has it survived so long? Because it still demonstrably fills a need. Business Relief was introduced in 1976 to avoid the often adverse impact on businesses of the death of the owners of the business. Before 1976, the passing on of a business between families incurred a significant tax for the beneficiary of the business on the capital transfer upon death of the original owner. The end result all too often was the business could not afford to continue and had to close. Clearly, otherwise successful businesses closing was not in the UK’s economic interest so the Government introduced business relief to provide an exemption to IHT for family businesses. Not much has changed in the preceding 40 years and thus why the relief remains as relevant today as ever.
Like me however, the relief has seen some changes and has grown up over time (OK, not like me then!). When it was originally introduced, the rate of IHT relief was 30%, increasing to 50% in 1987 until hitting its current rate of 100% in 1992. In 1996, it was extended to minority shareholders in a business which is when funds started to build relevant share portfolios for individuals and also allowed AIM shareholders to qualify for the IHT relief as well.
In the Autumn Budget of 2024, we came full circle with the rate of relief for AIM shareholders reducing back to 50% and whilst the full 100% relief is still available for unquoted businesses, investments in BR qualifying businesses are capped at £1M. So, whilst it may feel like AIM has “lost” its 100% relief, in actual fact it has merely reverted back to its original rate of 50%, which is still arguably a generous rate of relief. Of course, when lined up against the full 100% rate of relief for unquoted businesses, you can probably understand why AIM investors and the London Stock Exchange Group (LSEG) are crying foul.
So Inheritance Tax is very much in the news right now, with changes to business and agricultural relief, receipts from IHT not just creeping up but surging up and more and more individuals being caught (often stealthily) with an IHT bill thanks to frozen thresholds and reducing reliefs. You can also add to the mix the Great Wealth Transfer that is currently taking place.
With 70% of household wealth being held by the over 50s in the UK, it’s clear that the older generations hold the key to economic wealth and assets going forward. Because of this, many sons and daughters of these individuals are becoming increasingly reliant on this money being handed over to them and ensuring their own economic stability. Using my own parents as an example, both are still alive, both lived through prosperous post war years and both live very comfortably in retirement on gold plated pensions. The comfortability of my own retirement will most likely come down to how much they pass on to me. I suspect there are many others in the same position as me
So you can very quickly see how important an inheritance will be going forward and therefore what the rate of tax an individual will pay on that inheritance is. It will have a material impact on an individual’s standard of living going forward.
This is why business relief is a hugely important and flexible IHT planning tool. It affords every individual the opportunity to invest in unquoted businesses and receive relief from the full rate of 40% IHT. There are very few ways to mitigate IHT and simultaneously make an investment into unquoted, growing businesses from whom an investor can also receive a return on their investment. And don’t forget business relief is a flexible friend as making a BR investment doesn’t involve giving cash away or losing access to it. If you need the money back at any point, for any reason, BR funds are liquid to accommodate this. Plus, BR funds allow you to make withdrawals at any time which can potentially provide an individual with an income stream.
49 years after business relief was introduced, in April 2026 it will change once again and the introduction of a £1M allowance should persuade even more investors to take a second look. Something that can’t be said of the 49 year old me!
If you would like to know more about Business Relief, Inheritance Tax and how to structure portfolios to manage client tax headaches, then get in touch with our Business Development Team. They’re based all across the UK, have extensive experience in the tax-efficient investment landscape and can offer a wide range of services – from 1-2-1 or group training through to worked tax calculations and IHT calculators.
Click here to find the contact details for your nearest Blackfinch BDM