Many business owners assume that all assets shown on their business balance sheet automatically qualify for Business Property Relief (BPR) for inheritance tax (IHT) purposes. Unfortunately, that is not always the case.
One of the most commonly overlooked issues is the existence of “excepted assets”. These assets can significantly reduce the amount of BPR available and may result in an unexpected inheritance tax liability.
With the new BPR limits applying from 6 April 2026, reviewing your balance sheet has become more important than ever.
What is an Excepted Asset?
Under Section 112 of the Inheritance Tax Act 1984, an asset is an excepted asset if it:
- Has not been used wholly or mainly for the purposes of the business during the previous two years, and
- Is not required for future use in the business at the date of the transfer (such as on death or a lifetime transfer).
Both conditions are considered. This means HMRC applies:
- a historic use test, and
- a future business use test.
If an asset fails both tests, its value does not qualify for BPR.
Why Does It Matter?
From6 April 2026, the amount of 100% Business Property Relief available is generally limited to £2.5 million per individual (and certain trusts). Value above this limit generally qualifies for only 50% relief.
In addition, the value of any excepted assets is excluded altogether when calculating BPR.
Example
A trading company is valued at £2 million, including £100,000 of surplus cash held in a savings account.
If the £100,000 is an excepted asset:
- Total business value: £2,000,000
- Less excepted assets: £100,000
- Value qualifying for BPR: £1,900,000
The £100,000 receives no Business Property Relief, potentially increasing the inheritance tax exposure.
Common Examples of Excepted Assets
Surplus Cash
This is one of the most common areas of challenge by HMRC.
Cash that is genuinely required for:
- working capital,
- future expansion,
- capital expenditure,
- acquisitions, or
- other commercial purposes
will normally qualify as a business asset.
However, cash that simply sits in a deposit account or investment bond with no identifiable business purpose may be treated as surplus and therefore an excepted asset.
HMRC will typically consider questions such as:
- Is the cash actively used in the business?
- Does it finance day-to-day trading?
- How much working capital does the business normally require?
- Does the cash balance fluctuate?
- Is there evidence that the funds are earmarked for future commercial use?
Keeping board minutes or other evidence of planned business use can be valuable should HMRC review a BPR claim.
Private Assets
Assets used primarily for personal purposes rather than the business may also be excepted assets.
Examples include:
- residential property occupied privately,
- private vehicles,
- artwork or other personal assets held within the company.
What About Investment Assets?
Investment assets do not automatically prevent a business from qualifying for BPR.
Where investments are simply passive assets held alongside a trading business, HMRC may argue that they represent excepted assets or even a separate investment business.
However, where the business operates as a genuine single blended business, investment activities that are integral to the overall commercial operation may still qualify for relief.
The courts have confirmed this principle in several important cases, including:
- Farmer’s Executors v CIR [1999] SpC 216
- HMRC v AM Brander (Earl of Balfour’s Personal Representative) [2010] UKUT 300 (TC)
Each case depends heavily on its own facts.
Practical Steps for Business Owners
Now is an excellent time to review your balance sheet and ask:
- Are there significant cash balances with no documented commercial purpose?
- Are there assets being used privately?
- Are investment assets genuinely supporting the trading business?
- Is there evidence demonstrating future business use of surplus funds?
Acting before a future inheritance tax event can preserve valuable Business Property Relief.
