Business Property Relief and Surplus Cash: How Excepted Assets Can Reduce IHT Relief

Business Property Relief (BPR) is one of the most valuable inheritance tax (IHT) reliefs available to business owners. Where the conditions are met, BPR can reduce the IHT value of qualifying business assets by 100% or 50%, significantly limiting the tax exposure on death or lifetime transfers.

However, BPR is not automatic. Even where a company is clearly trading, relief can be restricted or partially denied if the company holds assets that HMRC considers to be outside the needs of the business. One of the most common problem areas is surplus cash.

This article explains how BPR works for single (non-group) trading companies, how the excepted assets rules operate, and what business owners should consider where cash balances have built up.

What is Business Property Relief?

BPR applies to transfers of value attributable to relevant business property, provided the statutory conditions are satisfied.

For example, shares in an unquoted trading company can qualify for BPR, subject to the company not being wholly or mainly engaged in excluded activities such as:

• dealing in land or buildings,
• dealing in stocks or shares, or
• making or holding investments.

From 6 April 2026, shares in an unquoted trading company can qualify for:

• 100% BPR up to an upper threshold of £2.5 million, and
• 50% BPR on the excess value above that threshold,

assuming all other conditions are met.

This relief can make the difference between a business passing to the next generation intact or being forced into a sale to fund an IHT liability.

The problem of excepted assets

Even where shares themselves qualify for BPR, the relief can be restricted if the company owns assets that are treated as excepted assets.

An asset is an excepted asset if it is neither:

• used wholly or mainly for the purposes of the business throughout the two years prior to the transfer (the past use test), nor
• required for use in the business in the future (the future use test).

Where an excepted asset exists, the value of the company shares qualifying for BPR is reduced by the value attributable to that asset (IHTA 1984, s 112).

In practice, this means that even a trading company can suffer a partial denial of BPR.

Surplus cash as an excepted asset

One of the most common examples of an excepted asset is excess cash held by the company.

While every trading company requires working capital, HMRC will examine whether the level of cash held goes beyond the reasonable needs of the business. Cash that cannot be justified as necessary for present or future business use is vulnerable to being treated as an excepted asset.

HMRC will typically ask questions such as:

• How much cash does the business regularly need to operate?
• Is the cash used to finance the trade?
• Does the cash balance fluctuate with trading activity?
• What are the company’s short-term and medium-term funding requirements?
• Is there a clear plan for using the cash in the business?

These questions focus on commercial reality, not intention alone.

Case law: how much cash is too much?

The difficulty is not whether a business needs cash, but how much.

In Barclays Bank Trust Co Ltd v IRC [1998], the company carried on a trade selling kitchen and bathroom fittings. At the date of death, the company held approximately £450,000 in cash.

HMRC accepted that around £150,000 was required for the business, representing roughly 25% of annual turnover. However, the remaining £300,000 was held to be surplus and therefore an excepted asset.

As a result, BPR was restricted by the value attributable to that excess cash.

The case demonstrates that:

• holding cash does not automatically disqualify BPR, but
• businesses must be able to evidence the commercial need for the level of cash retained.

Identifying the “right” level of working capital

There is no fixed formula for determining how much cash is acceptable. Factors that may support a higher cash balance include:

• seasonal trading patterns,
• exposure to bad debts,
• planned capital expenditure,
• expansion plans,
• contingent liabilities, or
• volatile input costs.

What matters is that the cash can be linked to clearly identifiable business needs, either current or anticipated.

Unsupported statements such as “we might need it” are unlikely to be sufficient on their own.

Using surplus cash before it becomes a problem

Where a company’s cash balance appears excessive, proactive planning may help protect BPR.

Possible options include:

• settling trade creditors earlier than required,
• repaying business loans or hire purchase liabilities where no penalties apply,
• investing in plant, machinery or systems used in the trade,
• funding expansion of the existing business, or
• acquiring or growing a qualifying trading subsidiary.

Each option involves commercial and tax considerations, but the key point is that leaving surplus cash idle can undermine an otherwise valuable relief.

Timing matters for IHT planning

The excepted assets rules look at use over time, not just at the date of death. This means:

• last-minute planning is often ineffective, and
• businesses should monitor cash levels as part of ongoing succession and estate planning.

Regular review of balance sheets and forward plans can help ensure that excess cash does not quietly erode BPR over time.

Practical tip

BPR can be restricted even where a company is clearly trading. Surplus cash is one of the most common reasons for partial loss of relief. Business owners should be able to demonstrate why retained cash is required and consider redeploying excess funds well in advance of any IHT event.

How can we help

If you own shares in a trading company and are relying on Business Property Relief as part of your inheritance tax planning, we can help you review whether the company holds any assets that could restrict relief. We can assess cash balances, identify potential expected assets, and help structure plans to protect BPR where possible. Please contact us to discuss your circumstances.