Business property relief can help mitigate inheritance tax after two years.

The government’s decision to freeze the inheritance tax (IHT) threshold at £325,000 for individuals and £650,000 for couples until at least 2019, means that thousands more people are being caught by the death tax.

According to the Office for National Statistics, the government saw a £3.1bn inheritance tax income for the tax year ending April 2013 – a significant jump from the 2011/12 tax year which saw an IHT income of £2.9bn.

Nigel Ashfield, managing director at Time Investments, says: “The decision to freeze the IHT allowance at £325,000 will mean that with inflation and rising house prices in many parts of the country, thousands more people will end up being liable to pay inheritance tax than ever before.

“What was once seen as a tax for the more wealthy in society is becoming more of a ‘mass market’ tax on people’s wealth. Indeed, when the IHT threshold was frozen in 2009 at £325,000, if the value had been linked to inflation, it would have risen to more than £377,000, an increase of more than £50,000.”

There are, of course, a number of ways in which to mitigate IHT, one of which is Business Property Relief (BPR). Initially introduced by the government in 1976, and having been extended to cover a wider remit of investments since then, BPR allows investors in unquoted shares to qualify for IHT exemption once the assets have been held for two years.

“The most robust interpretation is unquoted shares in a trading company. It was designed originally to stop people having to sell family companies to pay IHT bills, but there are a number of BPR schemes out there that offer people to invest in them and qualify for IHT relief as part of their tax planning,” explains Hugo Rogers, business development director at Puma Investments.

One of the key benefits of business property relief, aside from it only taking two years in order to gain exemption from IHT, is that the investor retains control of the asset and has flexibility when it comes to accessing it.

A further, relatively unknown, positive aspect of business property relief is that, should the primary investor pass away within the two years, but it was passed onto a spouse or civil partner, the qualifying period doesn’t start again.

Jason Butler, senior partner at Bloomsbury Wealth, explains: “In the event of a death within two years, BPR assets would be subject to IHT. However, if the asset is transferred to a spouse or civil partner upon death, it would be treated as if they had held it from outset and they would only need to survive for the remainder of that two-year period for it to be exempt from IHT – the first death does not restart the two-year clock. In this situation your spouse or civil partner would still retain full control and access to the capital.”