The IHT Business Property Relief (BPR) Trap: A 2025 UK Director's Guide to the "Wholly or Mainly" Trading Test

Picture this: You've spent 30 years building a successful UK limited company. It's your life's work. You've always assumed that when the time comes, you can pass the company shares to your children, and they'll be protected from Inheritance Tax (IHT) by Business Property Relief (BPR). But then, years later, your executor receives a staggering IHT bill for 40% of the company's value. Why? Because HMRC looked at the accounts and ruled your company was "wholly or mainly" an *investment* business, not the *trading* business you thought it was.

If this scenario sounds alarming, it should. It's one of the most common and expensive traps in UK succession planning. Getting the BPR qualification wrong can be the difference between passing on your legacy intact and leaving your family with a crippling, unexpected tax bill. The rules are notoriously grey, and the most confusing part for many directors is that "wholly or mainly" test. It’s not as simple as just "running a business."

What is IHT Business Property Relief (BPR) and Why Does the "Trading" Test Matter?

Inheritance Tax (IHT) is a tax on the estate (the property, money, and possessions) of someone who's died. The current threshold (nil-rate band) is £325,000, with an additional £175,000 for a main residence passed to direct descendants. Anything above this is typically taxed at 40%. For a business owner, a company worth £1,000,000 could create a £400,000 tax bill on its own, potentially forcing its sale.

This is where Business Property Relief (BPR) comes in. Let's use an analogy: think of BPR as an "economic engine" relief. The government provides it to protect active, risk-taking trading businesses—companies that employ people, create products, and contribute to the economy—from being broken up or sold just to pay an IHT bill. It's *not* designed to protect passive wealth-generating assets, like a portfolio of rental properties, even if you run it as a "business."

The relief is powerful: it provides 100% IHT relief on shares in an unlisted company or 50% on shares controlling over 50% of a listed company. But it all hinges on that one crucial definition found in the **Inheritance Tax Act 1984 (Section 105(3))**: the business must *not* be one that consists "wholly or mainly of... making or holding investments." This is the "trading test," and it's the battleground where many IHT disputes are fought.

The "Wholly or Mainly" Test: A Scenario-Based Breakdown

This "wholly or mainly" test is where most directors get caught. "Mainly" is generally interpreted by case law (like *Farmer v IRC*) as "more than 50%," but it's not a single, simple calculation. HMRC's guidance (IHTM25263) confirms they look at the business "in the round," applying multiple tests. A business could pass on one test (like turnover) but fail spectacularly on another (like asset value).

To make this clear, let's break down the four most common scenarios a UK business owner might face.

As you can see, the moment land or investments enter the picture, BPR becomes complex. The "Hybrid" case is especially common—many successful trading companies build up large cash balances or buy property, accidentally poisoning their BPR status.

Deep Dive: The Common Traps That Disqualify BPR

Let's look more closely at the three biggest traps that catch directors out.

Trap 1: The Buy-to-Let (BTL) Property "Business"

This is the most straightforward exclusion. Many landlords refer to their portfolio as a "business," and for income tax, it is. But for Inheritance Tax, it is not. The law is clear: a business involved in holding land to generate rental income is an investment business. It does not matter how much work you put in, how many properties you have, or whether you have a limited company. The fundamental activity is "holding investments," and it is barred from BPR.

Trap 2: The Furnished Holiday Let (FHL) Dilemma (Post-April 2025)

This is a timely and critical trap. The **Spring Budget 2024 announced the abolition of the tax-advantaged FHL regime from 6 April 2025** (HM Treasury, 2024). This removes specific income tax and Capital Gains Tax breaks, aligning FHLs more with standard BTLs.

However, for IHT, the test was *already* different and much harder to pass. To get BPR, an FHL business must be run more like a hotel, with significant services. Simply providing clean linen, Wi-Fi, and a key is not enough—that's just part of the property investment. Landmark cases (like *HMRC v Lockyer & Barlow*) have set an extremely high bar, requiring services like meals, personal concierge, and entertainment. With the FHL regime being abolished, it's even more likely that HMRC will view these as investment businesses by default.

Trap 3: "Excepted Assets" – The Cash Hoard in Your Trading Company

This is the most insidious trap for *genuinely* trading businesses. Your company might be 90% trading, but BPR can be reduced if it holds "excepted assets"—assets not used for the trade and not needed for future trade use.

Let's use a second analogy: think of your trading company as a delivery van. The van and the business it serves get 100% BPR. But if you're also using the van's loading bay to store your personal art collection, HMRC will say the art is an 'excepted asset' and its value won't get relief. A large cash balance, far beyond the company's working capital needs, or an investment property bought "on the side" are treated exactly the same way. The BPR relief will be reduced proportionally by the value of these non-trading assets.

Step-by-Step: How HMRC Assesses the "Wholly or Mainly" Test

When HMRC investigates a BPR claim, they don't just look at one number. They apply several tests to build an "in the round" picture of the business. You can use this as a health check:

1. The Asset Test: Look at the company's balance sheet. What is the value of trading assets (factory, machinery, stock) vs. investment assets (rental properties, excess cash)? If over 50% of the value is in investments, BPR will likely fail.
2. The Turnover Test: Look at the profit and loss account. Is more than 50% of the company's revenue coming from trading activities versus, say, rental income?
3. The Profit Test: Where do the net profits come from? A trading arm might be low-margin, while a small investment property generates high profits, which could skew the picture.
4. The Time Test: Where do the directors and employees spend their time? If 80% of staff hours are spent on the trading side, that's a strong argument, even if the investment assets are valuable.
5. The Overall Context Test: What was the original intention of the business? How is it presented to the world? What's the "look and feel" of the business?

A company can fail one test and pass, but if it starts failing multiple (e.g., 60% of asset value and 70% of profit comes from investments), the BPR claim will almost certainly be denied.

Common Questions About IHT Business Property Relief

Based on questions I've seen from business owners on forums like r/UKPersonalFinance and accounting communities, here are the most common points of confusion.

My limited company is a buy-to-let business. Can my children claim Business Property Relief (BPR) on the shares when I die?

This is the most common question, and the answer is almost certainly **no**. A business that "wholly or mainly" deals in land or buildings for investment is explicitly excluded from BPR by the Inheritance Tax Act 1984. The activity of collecting rent is considered a passive investment, not an active trade, regardless of how much work is involved.

What does 'wholly or mainly trading' mean for BPR? My trading company has a £500k cash balance. Is that an 'excepted asset'?

This is the "excepted asset" trap. The £500k *could* be an excepted asset, which would reduce the value of your BPR claim. The test is whether the cash is required for the *future needs of the trade*. If you can show in board minutes and forecasts that the £500k is allocated for a new factory, a major R&D project, or to cover a large upcoming order, it is likely *not* an excepted asset. If it's just sitting in a high-interest account with no purpose, HMRC will likely exclude it from relief.

Now that the Furnished Holiday Let (FHL) tax regime is being abolished in 2025, will FHL businesses still qualify for BPR?

The abolition of the FHL tax regime in April 2025 (which related to income tax and CGT) does not technically change the IHT test for BPR. That test was *always* separate and much, much harder to pass. To qualify, the FHL business must provide a very high level of *additional services* (like a hotel), not just provide accommodation. Given that the bar was already extremely high, and the "business" status of FHLs is being downgraded for other taxes, it is very unlikely that a typical FHL business will qualify for BPR.

Conclusion: Your Next Steps

Business Property Relief is one of the most powerful and valuable reliefs in the UK's Inheritance Tax system. For genuine trading companies, it allows a lifetime's work to be passed on to the next generation without a 40% tax charge. But it is also a minefield, and it is not a "given."

The "wholly or mainly" trading test is the critical hurdle. If your business has *any* investment element—whether it's a single rental property, a large cash balance, or a Furnished Holiday Let—you cannot assume you will qualify. If you are a UK limited company director, your first step is to review your company's activities, assets, and accounts *now* with an IHT perspective. Don't leave it for your executors to fight with HMRC.

This area of tax is highly complex and heavily litigated, with the outcome often depending on the specific facts of each case. This guide provides an informational framework for understanding the risks, but for succession planning involving your business, it is *essential* to seek paid, professional advice from a qualified tax advisor and solicitor who specialize in IHT and BPR.