Family businesses thrive across generations by innovating, adapting, and exploring new markets and opportunities. They make investment decisions for the long term, including maintaining a stable tax policy which works towards supporting the business’s ambitions and follows a clear plan.
At Laytons ETL, we pride ourselves on offering family businesses the support with tax that they need. Often, Business Property Relief (BPR) is a useful tool within succession planning for family members involved in ownership of a business.
Using BPR, means that “qualifying assets”, up to a value of £2.5 million, following the changes introduced from 6 April 2026, are able to be passed on with up to 100% relief from tax. This can mean the difference between a smooth generational transition and a forced sale to cover a hefty tax bill. However, there are strict ownership rules that need to be met in order for relief to be available. But what exactly are they?
The Two-Year Ownership Requirement
The first is the two-year ownership requirement, this is fairly straightforward to understand. For Inheritance Tax (IHT) purposes, there is a general requirement that the business property must have been owned for a minimum period of two years. Although, there are certain exceptions to this basic two-year ownership requirement.
The first is the ‘replacement property’ rule, which is in place for circumstances when you’ve sold or replaced one qualifying business asset with another, the ownership period can be carried over from the old to the new, meaning if you already owned the old asset for over two years, you don’t have to wait any time with this new asset. With this, there must be no gap where the value isn’t tied up in qualifying business assets. For advice on the replacement property rule, speak to one of our Private Wealth team today.
Another exception to the two-year rule is when successive deaths occur with the transfer of BPR. So, if BPR applied on a first death, and the recipient dies shortly after, then relief can still be available on the second death, even if the second owner hasn’t held the asset for two years.
Transfers on Death Vs Lifetime Gifts
When a married individual or civil partner dies, assets qualifying for BPR can pass to the surviving spouse free from inheritance tax under both the spouse exemption and section 108 of the Inheritance Tax Act 1984 which governs the availability of BPR. In this instance the surviving spouse is treated as having owned the assets for the entire period they were held by the deceased. As a result, the two-year qualifying period for BPR does not restart on transfer.
In contrast, while lifetime transfers between spouses remain exempt from inheritance tax, they do not benefit from continuity of ownership. As a result, the recipient must satisfy a new two-year ownership period to qualify for BPR.
The Risk in Trust Structuring
Although transfers between spouses are exempt from inheritance tax, an immediate onward transfer into trust can trigger a chargeable lifetime transfer (CLT). In these circumstances, BPR may be unavailable, leaving the full value exposed to tax.
This is because the spouse, as the transferor, has not satisfied the two-year ownership requirement and, unlike transfers on death, lifetime transfers do not preserve the deceased’s period of ownership.
Example Case Study
Imagine a family business owner holding a £40 million shareholding. They propose transferring the shares to his or her spouse and then immediately settling them into a trust. On the surface, this might seem like a smooth succession plan. However, under current inheritance tax rules, this structure would be treated as a CLT.
Value of the transfer: £40 million
Potential IHT liability: £8 million (20% of the transfer exceeding any available nil-rate band)
Even though transfers to a spouse are normally exempt, the immediate settlement into trust breaks the chain of spouse exemption, making the shares subject to IHT if their value exceeds £2.5 million or if the two-year period of ownership is not satisfied.
For expert guidance on utilising trust structures to maximise the value of your assets when they’re passed on, speak to our expert Private Wealth team at Laytons ETL today.
Planning to settle business assets into trust? Our private wealth specialists help structure transactions correctly and avoid unexpected tax liabilities.
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Disclaimer: This publication is provided by Laytons LLP for informational purposes only. The information contained in this publication should not be construed as legal advice. Any questions or further information regarding the matters discussed in this publication can be directed to your regular contact at Laytons LLP or Laytons’ Private Wealth & Philanthropy team.
