Balancing Legacy and Taxation: The Evolution of Business Property Relief in the UK

Introduction

Business Property Relief (BPR) has been a significant but sometimes contested component of the UK's inheritance tax framework for many decades. It was introduced in 1976 to enable the intergenerational transfer of family-owned businesses and agricultural assets by reducing their taxable value for Inheritance Tax (IHT) purposes (Masala, 2024). This short report traces the origins of BPR and how debates about BPR evolved prior to the recent reforms introduced in the October 2024 Budget. By drawing on historical insights from the debates surrounding Estate Duty after World War II, the report seeks to inform ongoing policy debates and highlight key lessons for future reform and is part of a wider programme of work assessing the impact of these reforms on both family firms and the wider UK economy.

This policy report is the first of two on the topic of BPR. The second in the series will pick up the narrative from 2024 onwards and take an in-depth look at the recent reforms and the reaction to them. It will examine the evidence and policy arguments about their likely impact, including any unanticipated consequences the changes might have for family businesses in the UK. The report will also consider evidence from other European countries on the effects of changes to inheritance tax policies on family-owned firms.

Origins in Estate Duty and Early Challenges [1]

The concept of specific reliefs for businesses and farms under wealth transfer taxes developed over time (Masala, 2024; Seely, 1995). BPR’s roots lie in Estate Duty, introduced in 1894 as the first substantial capital tax charged on the value of a person's estate at the time of their death, the forerunner of inheritance tax (IHT) (Fletcher, 2021; Seely, 1995). According to Fletcher, Estate Duty was designed to redistribute wealth and applied to estates which consisted of family shareholdings in private companies. Estate Duty was charged at graduated rates initially between one and eight per cent, but these rose dramatically so that by 1949, the top band peaked at 80 per cent (Seely, 1995; Fletcher, 2021).

The 1940 Finance Act introduced significant changes to the valuation methods for unlisted shares charged for Estate Duty and falling under the control of fewer than five individuals (Fletcher, 2021). These changes, Fletcher argues, resulted in large tax liabilities that triggered widespread ‘anticipatory action’ among business owners.

There was concern in the UK business community about the negative impact that Estate Duty was having on businesses and warnings came from all quarters (Fletcher, 2021, 2023). The changes to the valuation methods for unlisted shares were resisted by business groups such as the Federation of British Industries and the National Union of Manufacturers, who argued that valuations were disconnected from sale value (Fletcher, 2021). Business experts, advisors, industry bodies and professional associations were against the changes – including the Institute of Directors, the Association of British Chambers of Commerce, and the Institute of Bankers). The Economist Intelligence Unit (EIU) was commissioned by the National Union of Manufacturing to carry out an independent enquiry into the impact of Estate Duty on business to assess the impact of the reforms (Fletcher, 2021). According to Fletcher,

“These warnings came in the form of evidence backed reports illustrating the harm being done and the ‘anticipatory action’ being undertaken by business to avoid the Duty”

Fletcher, 2021, p.194

“[O]wners of shares in businesses which would fall under the 1940 Act rules were concerned with the changes to valuation methods and undertook various measures to mitigate the harm that the tax might inflict. These measures are referred to as anticipatory action”

Fletcher, 2021, p.196

In response to the high levels of Estate Duty and changes in the valuation rules, such anticipatory actions could involve businesses limiting their growth, accumulating non-business assets, or selling the business entirely to avoid the punitive charges (Fletcher, 2021). Businesses could be put under pressure to restructure or liquidate assets to meet tax obligations. High-profile firms, Fletcher notes, including Teacher (Distillers) Ltd and Templeton Carpets, converted to public limited companies to generate marketable securities for future liabilities. The changes had the effect of compromising family control - as Fletcher explains, “conversion to public companies was one of the few routes available for families to realise value and meet the tax liabilities...but it frequently involved the dilution or loss of family control, and a fundamental shift in business identity” (Fletcher, 2021, p. 201).

To counteract these negative effects, the 1954 Finance Act introduced a “business rate” — the foundation of today’s BPR—aligning with agricultural property relief. This was intended to protect manufacturing family firms from capital erosion (Fletcher, 2021).

The Emergence of Business Property Relief

Estate Duty remained the principal form of wealth taxation on death in the UK until it was replaced by Capital Transfer Tax (CTT) in 1975 under the Finance Act 1975. CTT was designed to tax all gratuitous transfers of capital—both lifetime and on death—at progressive rates. Its introduction aimed to close key avoidance loopholes in the Estate Duty system, such as the exemption of trusts and the “seven-year rule” which allowed wealthier individuals to transfer assets long before death and escape taxation (Seely, 1995; Masala et al., 2024). No relief was initially offered to businesses and for transfers of business assets (Fletcher, 2021).

The Labour Government amended the CTT regime in 1976 by introducing Business Property Relief (BPR) (UK Parliament, 1976). The relief initially applied at a rate of 30 per cent to a limited set of business assets, including unincorporated businesses and shares in unlisted companies (Seely, 1995). Relief also extended to plant and machinery. The policy intention here was to avoid the forced liquidation of otherwise viable family businesses by reducing their inheritance tax burden (Masala et al., 2024; UK Parliament, 1990).

A significant shift occurred in 1986, when CTT was replaced by Inheritance Tax (IHT) under Chancellor Nigel Lawson (Seely, 1995). This reform abolished the taxation of lifetime gifts to individuals and introduced the seven-year rule in its current form, with taper relief for gifts made between three and seven years before death. This change was justified on the grounds that the CTT regime discouraged intergenerational transfer of business assets and undermined entrepreneurship (Seely, 1995).

The Conservative Government further expanded BPR in 1992. In line with Prime Minister John Major’s vision of allowing “wealth to cascade down the generations”, the rate of relief was increased - from 50 to 100 per cent for unincorporated business interests, owner-occupied farmland, and shareholdings above 25 per cent in unquoted companies (Seely, 1995).

The UK Government justified these changes as a way to eliminate distortions in estate planning and ensure that tax policy would not influence decisions about when and how to transfer family businesses. According to then-Economic Secretary Anthony Nelson, the goal was to allow these transfers to proceed “without a forced sale or break-up arising from the need to pay an inheritance tax bill” (Seely, 1995, p.19).

In 1996, HMRC also clarified that shares listed on the Alternative Investment Market (AIM) were to be treated as 'unquoted' for BPR purposes, thereby qualifying for 100 per cent relief if held for at least two years (HMRC, 2025; Advani and Sturrock, 2024).

OTS Review of IHT and BPR

Between 2017 and 2021, the Office of Tax Simplification (OTS) undertook a review of IHT, focusing on administrative complexity and the design of key reliefs, including BPR. Commissioned by the Chancellor in January 2018, the review aimed to identify opportunities to simplify IHT (OTS, 2018b). The OTS’s first report found BPR to be broadly functional but flagged areas of ambiguity, particularly the inconsistent treatment of furnished holiday lettings, joint ventures, and limited liability partnerships (OTS, 2018a). Its second report in 2019 addressed more structural concerns, questioning whether features such as the inclusion of AIM-listed shares and the lower trading threshold for BPR compared to Capital Gains Tax reliefs remained aligned with BPR’s original purpose of preventing forced business sales on death (OTS, 2019a).

The OTS recommended a series of reforms to improve the clarity, consistency, and targeting of BPR (OTS, 2019). However, in its November 2021 response, the Government declined to adopt these proposals, citing broader fiscal and policy considerations (HM Treasury, 2021). As a result, BPR remained unchanged during this period, despite growing calls for reform to enhance fairness, limit avoidance, and better align the relief with its policy intent.

The Current BPR Regime

BPR currently applies to assets such as unlisted shares and business property, providing relief at rates of 50 or 100 per cent (Policy Points, 2024). Qualifying conditions included a two-year holding period and business activity requirements. Investment businesses, or those not run for profit or winding-up, were excluded. BPR could not be claimed in addition to Agricultural Property Relief (APR) (House of Commons Library, 2025). The central rationale for BPR remained to facilitate intergenerational transfer of businesses without triggering sales or insolvency to meet tax bills (Policy Points, 2024; Advani and Sturrock, 2023).

In 2021/22, 4,170 estates claimed BPR, costing the Treasury approximately £1.1 billion (HMRC, 2024; House of Commons Library, 2025). Nearly 75 per cent of the cost relates to estates with assets exceeding £1 million. Unlisted shares accounted for 65 per cent of claims and between 60 and 80 per cent of relief value, up from 43 per cent in 2011/12 (HMRC, 2023).

Figure 1 charts a timeline tracing the evolution of BPR from Estate Duty to the recent reforms under the current government (discussed below).

Figure 1 The Evolution of Business Property Relief in the UK (1894-2026)

Sources: Fletcher, 2021, 2023; Seely, 1995; House of Commons Library, 2025; Policy Points, 2024

Criticism of BPR and IHT Reliefs

BPR has attracted growing criticism from think tanks and international policy bodies in recent years. A key concern, highlighted by the Resolution Foundation (Corlett, 2018), is that it strayed from its original purpose of helping family-run businesses remain intact across generations. Instead, it now enables wealthy individuals to pass on assets tax-free—often with little to no involvement in the underlying businesses. For example, investors can purchase shares in unlisted or AIM-listed companies specifically to qualify for BPR, even if they never actively participated in running the business. Their heirs may then sell the business soon after inheritance, still benefiting fully from the relief. To address this, the Resolution Foundation proposed limiting BPR to genuine family businesses, introducing a cap on the value that qualifies, lengthening the minimum ownership period, and adding a clawback provision if assets are sold shortly after inheritance (Corlett, 2018).

The OECD (2021) has also raised concerns about the efficiency and fairness of inheritance tax systems across its member countries, including the UK. It noted that preferential reliefs—particularly for business and agricultural assets—significantly narrow the tax base and benefit mainly high-wealth households. The OECD found limited empirical evidence that such reliefs generate strong economic or employment gains and argued that BPR may distort investment decisions and allow for tax planning opportunities that weaken the progressivity of the tax system.

Two reports from the Institute for Fiscal Studies (IFS) further scrutinised BPR. In Taxing Work and Investment Across Legal Forms, Advani et al. (2021) observed that BPR, along with other reliefs, introduces large discrepancies in how different forms of wealth are taxed, particularly benefiting those who inherit business assets rather than other types of wealth. In a later report, Reforming Inheritance Tax (Miller and Pope, 2023), the IFS proposed replacing IHT with a lifetime receipts tax, arguing that current reliefs like BPR reduce the tax base and disproportionately benefit the wealthy. The authors recommended tighter targeting of BPR towards active family businesses, removal of reliefs for passive investments, and limiting overall use of tax-free transfers to improve equity and revenue efficiency.

By contrast, supporters of BPR have argued that it plays a critical role in facilitating long-term business continuity, local employment, and investment. A 2024 report by Family Business UK (FBUK) maintained that BPR is essential to avoid forced sales of family firms upon succession, enabling business owners to pass control to the next generation without disruption. Without BPR, the report argued, many family firms would face liquidity crises during succession, undermining community jobs and local growth (FBUK, 2024). The Family Business Research Foundation (FBRF), in its white paper Supporting Succession, also stressed the importance of BPR for generational continuity (Policy Points, 2024). It highlighted how BPR reduces the risk of hasty or premature transfers and allows businesses to implement succession plans based on readiness rather than tax pressure.

The October 2024 Budget Reforms

In the Autumn Budget 2024, the UK government announced reforms to BPR effective from April 2026:

• Introduction of a cap of £1 million on combined agricultural and business assets eligible for 100 per cent relief, with 50 per cent relief applicable thereafter.

• Reduction to 50 per cent relief for all previously eligible unlisted shares (HM Treasury, 2024a, 2024b; House of Commons Library, 2025).

The Government has claimed these changes will affect only a small minority of wealthy estates (UK Parliament, 2024). The Office for Budget Responsibility (OBR) has forecast that they will generate additional revenue of approximately £0.5 billion annually from 2027/28, although these projections remain uncertain due to possible taxpayer behavioural responses (OBR, 2024).

Organisations representing family businesses such as FBUK have raised significant concerns about these reforms and argue that they will negatively impact family businesses in the UK by disrupting succession planning, reducing long-term investment, and limiting employment growth. In research commissioned by FBUK, CBI Economics (2025) has forecast a potential £14.8 billion reduction in economic output and net fiscal losses of around £1.9 billion between 2026 and 2030 due to diminished economic activity.

Conclusion

BPR has historically safeguarded family-owned businesses, facilitating intergenerational transfers by reducing tax liabilities. Recent reforms in the 2024 Budget aim to curb escalating costs and close identified loopholes, marking a significant shift in policy. Yet, historical parallels—such as the disruptive effects of post-war Estate Duty—caution us about potential unintended consequences that might undermine family business continuity and economic resilience.

As the policy landscape evolves, a key question is whether the 2024 reforms to BPR strike the right balance between fairness and economic resilience. Further research will be essential to evaluate the impact of these changes and to ensure that future tax policy supports both economic growth and the continuity of family businesses in the UK.

A deeper understanding of the historical and contemporary relationship between inheritance tax, BPR, and family enterprise is also needed. Priority areas for future research include:

• Drivers of the 2024 BPR reforms: Historical and policy research to identify the political, economic, and institutional factors behind the introduction of the £1 million cap and reduced relief rates, including the role of fiscal pressures, equity concerns, and stakeholder influence.

• Family business responses and anticipatory strategies: Empirical studies exploring how family firms adjust to the reforms—such as through changes in ownership structure, succession planning, investment timing, or business model adaptation.

• Impact of BPR on productivity and investment behaviour: Economic and business historical research assessing how BPR has influenced productivity and investment in family firms, and whether it has supported sustainable enterprise growth across the sector.

As part of a wider programme to assess the impact of the reforms to BPR on family businesses, the FBRF is undertaking further work to understand how the reforms have affected family businesses and business families before and after April 2026, when the BPR reforms will come into effect. More details about the research can be found here. This research will build on the FBRF’s recent white paper on Business Property Relief, Supporting Succession (Policy Points, 2024) and economic studies by CBI Economics/FBUK (2024, 2025) and will contribute to building the evidence base needed to evaluate the impact of these tax policy reforms.

Notes

[1] This section draws on the research by Marie Fletcher (2016, 2021, 2023) which investigated the history of Estate Duty in the UK and its impact on unlisted private firms, including family businesses.

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