A buy and sell agreement, under which a partner’s or shareholder’s personal representatives must sell and the survivors must buy, is a binding contract for sale under section 113 of the Inheritance Tax Act 1984, so the business interest or shares lose business relief entirely. HMRC accepts that options are different: if the survivors and the personal representatives each have only an option, no contract exists at death and relief remains available.

What does section 113 actually say?

Section 113 of the Inheritance Tax Act 1984 (IHTA 1984) provides that where property would be relevant business property, but a binding contract for its sale has been entered into at the time of the transfer, it is not relevant business property in relation to that transfer. There are only two exceptions:

  • the property is a business or an interest in a business and the sale is to a company that is to carry on the business, made wholly or mainly in return for shares in or securities of that company (in practice, an incorporation); or
  • the property is shares in or securities of a company and the sale is made for the purpose of a reconstruction or amalgamation.

The rule applies to any transfer of value, including the deemed transfer of the whole estate on death. So the question for a partnership deed or shareholders’ agreement is simple: at the moment of death, was there already a binding contract for the deceased’s interest to be sold? If there was, the value is taxed in full, whatever the trading record of the business. The general conditions for business relief never come into play.

Why does HMRC treat a buy and sell agreement as a contract for sale?

HMRC’s view is set out in Statement of Practice 12 (1980), published on 13 October 1980 and still current. It describes agreements under which, if one partner or shareholder director dies before retirement, the personal representatives are obliged to sell and the survivors are obliged to buy the deceased’s business interest or shares, often with the price funded by life assurance policies. Because such an agreement requires a sale and purchase, and does not merely confer an option to sell or buy, HMRC regards it as a binding contract for sale within section 113, and business relief is not due.

HMRC’s Inheritance Tax Manual at IHTM25292 adds that only most exceptionally does a partnership or shareholder agreement fall within section 113. To do so, it must provide that the interest passes to the personal representatives, that they are required to sell it, and that the survivors are obliged to buy. Those requirements are rarely all met, but when they are, relief is lost.

Which arrangements are not caught?

HMRC lists several common arrangements that do not amount to a contract for sale (IHTM25292 and the Shares and Assets Valuation Manual at SVM111120):

  • Automatic accrual for a price. The deceased’s interest passes to the surviving partners or shareholders, who must pay the personal representatives a stated price.
  • A one way option. The interest falls into the estate but the survivors have an option to buy it.
  • Pre emption articles. Company articles require the personal representatives to offer the shares to the company, other shareholders or directors, but nobody is obliged to buy. If, exceptionally, one side must offer and the other must buy, relief is denied as with a buy and sell agreement.
  • A sale at undervalue. Property is not disqualified where the transfer of value is itself a sale for partial consideration.

HMRC also says there is no need to enquire in every case unless there is some sign that a contract for sale existed at the time of the transfer. Caseworkers who think a partnership agreement denies relief under section 113 are told to refer the case to HMRC’s Technical team.

How do cross options avoid the problem?

A cross option agreement replaces the two obligations with two options. The survivors receive an option to buy the deceased’s interest (a call option), and the personal representatives receive an option to require the survivors to buy it (a put option). Each option is usually exercisable within a fixed period after death.

Until one side exercises its option there is no obligation to sell or buy, so at the moment of death there is no binding contract for sale. That is the distinction drawn in Statement of Practice 12 (1980): an agreement that requires sale and purchase is caught, while one that merely confers an option to sell or buy is not. The interest therefore remains relevant business property on death, and relief can be claimed if the other conditions are met. When an option is later exercised, a contract arises, but that happens after the death and does not reach back to the transfer that was charged.

The commercial effect is close to that of a buy and sell agreement. Either side can force the sale, so the family still receives cash and the survivors still gain control. The agreement should be reviewed to make sure no clause turns the options back into automatic obligations, for example wording under which the sale happens on death unless someone objects.

Can the price in the agreement reduce the value for inheritance tax?

Usually not in the way people expect. IHTM25101 says the open market value of a deceased partner’s share is normally required, and a restriction on a partner’s freedom to dispose of a share is called a fetter. IHTM25120 explains that where a fetter, such as a right for survivors to take a share below market value, was created after 26 March 1974, its creation may itself have been a lifetime transfer, which reduces the open market value on death. For deaths and chargeable transfers on or after 6 April 2026, a fetter created within the allowance period may also reduce the 100% relief allowance available. The safer course is to let the agreement work at full value and rely on business relief, rather than on a discounted price.

Does section 113 affect lifetime gifts and sales?

Yes. HMRC says that where a lifetime transfer other than a potentially exempt transfer is made shortly before a sale, it will investigate whether relief is properly due (IHTM25291). The valuation manual makes the test a factual one: if there was no binding contract for sale at the date of the transfer, business relief is due, even if a sale had been negotiated. Signing heads of terms is different from exchanging a binding contract, so timing should be documented carefully.

A contract for sale can also cause problems after a gift. If the donor dies within seven years, relief on the gift is tested again on a notional transfer by the recipient just before the death. Section 113B(5) refers specifically to original property that is excluded by section 113 at that point. The rules are covered in the clawback rule on lifetime gifts.

How does the £2.5 million allowance change the picture?

For deaths on or after 6 April 2026, GOV.UK confirms that 100% relief is capped at £2.5 million of combined business and agricultural property, with 50% relief above that, and that a surviving spouse or civil partner’s estate can claim any unused allowance from the first death, giving up to £5 million. The transferred allowance must be claimed by the later of four years after the death and six months after the executor or administrator started acting.

The cap makes section 113 more costly, not less. A buy and sell agreement does not just reduce relief from 100% to 50%: it removes relief entirely, so even the 50% rate on value above the allowance is lost.

Illustration only.

Three directors each own a third of an unquoted trading company. Rachel’s shares are worth £900,000 when she dies in 2027, and the rest of her estate uses her nil rate band.

Agreement in place Business relief Taxable value of shares Tax at 40%
Buy and sell (both sides obliged) None, section 113 applies £900,000 £360,000
Cross options 100%, within her £2.5 million allowance Nil Nil

The cash paid by the surviving directors is the same in both cases. Only the wording of the agreement changes the tax.

What mistakes come up most often?

  • Old partnership deeds or shareholder agreements written before anyone considered section 113, still containing mutual obligations to sell and buy.
  • Assuming that a life policy written in trust for the survivors deals with the tax. It provides the cash, not the relief.
  • Articles of association that have been amended so that a deemed transfer notice binds both sides.
  • Forgetting that section 113 only removes relief from property that would otherwise qualify. An investment company’s shares fail anyway, as explained in the guide to property letting companies.
  • For partnerships, failing to check how the agreement interacts with the valuation of capital and current accounts, covered in business relief for sole traders and partners.

Executors report the interest and claim relief on form IHT400 with schedule IHT413, and HMRC’s manual tells its caseworkers to check any partnership articles for provisions on how a deceased partner’s share is valued (IHTM25101), so the agreement should be sent with the account.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.