For a sole trader or partner, business relief applies to the business or the partnership share as a whole, valued at its net value: the market value of the assets used in the business, including goodwill, less business liabilities. Money the owner has lent to the business is a liability, not part of that value, and property the owner holds outside the business but lets the firm use gets only 50% relief.

What exactly qualifies for an unincorporated business?

The first category of relevant business property in section 105(1)(a) of the Inheritance Tax Act 1984 (IHTA 1984) is property consisting of a business or an interest in a business. HMRC’s Inheritance Tax Manual confirms this covers a sole trader’s business and a partner’s share in a partnership (IHTM25152). “Business” includes a profession or vocation but excludes anything not carried on for gain (section 103(3)), and a business that is wholly or mainly investment or dealing is excluded by section 105(3).

HMRC used to say relief applied only to a whole business or a share of one, not to individual assets. Since HMRC v Trustees of the Nelson Dance Family Settlement [2009] EWHC 71 (Ch), it accepts that relief can apply where a gift of a business asset reduces the value of the transferor’s relevant business property, for example business property transferred into trust (IHTM25152 and IHTM25250). An asset used in somebody else’s business does not qualify under section 105(1)(a) at all.

How is the value of the business worked out?

Section 110 says the value of a business or an interest in a business is its net value: the value of the assets used in the business, including goodwill, reduced by the liabilities incurred for the purposes of the business. For an interest, only the assets and liabilities that would count in valuing the entire business are taken into account.

In practice HMRC starts from the balance sheet at the date of death or gift (IHTM25082):

  • Book values of property, plant and equipment are replaced by open market values, with property referred to the Valuation Office Agency.
  • Goodwill is rarely shown but must be valued; HMRC says no goodwill exists for farming or NHS medical practices.
  • Income tax and capital gains tax shown as liabilities are excluded because they are personal, not business, debts.
  • Creditors and wages owed to relatives are tested for a genuine business liability.

The capital account is the starting point only. HMRC adjusts it by the net increase or decrease from revaluing the assets (IHTM25083). For a partnership, following Gray v IRC [1994] STC 360, a partner’s share is valued by reference to the appropriate share of each asset, with no discount for costs of sale (IHTM25102), and revaluation differences are shared in profit sharing ratios unless the agreement says otherwise (IHTM25103). See business valuation methods for the wider picture.

How are capital, current and loan accounts treated?

The balances in a partner’s accounts are not all the same thing for inheritance tax.

Balance HMRC treatment
Capital account Part of the partner’s interest, adjusted to market values (IHTM25083, IHTM25103)
Loan account (money lent to the firm) A liability of the business, so not part of its net value under section 110(b) (IHTM25153)
Balance left by a retired partner A loan; the retired partner is a creditor, so no relief (Beckman v IRC [2000] STC (SCD) 59, IHTM25250)
Partner’s tax reserve Treated by HMRC as a loan to the partnership, so no relief (IHTM25250)

A current account of undrawn profits sits between these. The HMRC manual pages on valuing partnership interests do not single it out, so the Beckman principle is the guide: if the balance is part of the partner’s share of the firm, it counts in the net value; if the deed or the facts show it is money owed to the partner as a creditor, it falls outside. Partnerships often record undrawn profit in different ways, as explained in partnership capital and current accounts, so the deed and the accounts need to be read together. Relabelling a loan account as capital does not help if the money is surplus to the business, because the excepted assets rule below still applies.

Which assets in the business get no relief?

There are two filters (IHTM25341). First, under section 110, assets not used in the business at the date of the transfer are left out altogether. HMRC focuses on cash, bank and building society balances shown in the accounts, though it takes trading cycles into account, for example a farm holding cash between selling a harvest and buying next year’s seed (IHTM25342).

Second, section 112 makes an asset an excepted asset if it was neither used wholly or mainly in the business throughout the last two years (or the period of ownership, if shorter) nor required at the time of transfer for future use. An asset used wholly or mainly for the personal benefit of the owner or a connected person is treated as not used in the business (section 112(6)). GOV.UK gives the example of a building with a shop on the ground floor and the owner’s home above: the shop can qualify, the home cannot. Section 112(4) lets the part used exclusively in the business be treated as a separate asset.

Borrowing also needs care. Finance Act 2013 rules restrict the deduction of liabilities, including money borrowed to acquire, maintain or enhance assets that qualify for business relief (IHTM25053).

How does the two year ownership rule apply?

Section 106 requires the property to have been owned by the transferor throughout the two years before the transfer. For a business interest, HMRC applies this to the business as a whole, not to each asset. Capital and assets introduced less than two years before death still count towards net value if they were used in the business at the date of death (IHTM25342). The nature of the business can change during the two years, provided there was a business throughout (IHTM25303).

What about property the partner owns personally?

Property, buildings, machinery or plant owned by a partner outside the partnership but used wholly or mainly by it can qualify under section 105(1)(d) (IHTM25225). GOV.UK confirms that this category gets 50% relief, and from 6 April 2026 section 104 limits the 100% rate to business interests and unquoted shares, so this property never gets 100%. Two further conditions apply:

  • the asset must have been used by the business throughout the two years before the transfer, or replace an asset so used for two of the last five years (section 112(3));
  • the owner’s partnership interest must itself be relevant business property (section 105(6)), so a landlord cannot buy into the tenant firm shortly before death to obtain relief (IHTM25224).

Section 105(1)(d) covers only companies and partnerships. A sole trader’s own premises used in the business are simply assets of the business under section 105(1)(a). The equivalent rules for premises used by a company the owner controls are covered in property used by your own company.

HMRC accepts that property included as an asset of the business falls under section 105(1)(a) rather than (d) (IHTM25274), so whether premises are truly partnership property affects the rate. HMRC looks at the evidence of beneficial ownership, not just the accounts, and any transfer into the firm has Stamp Duty Land Tax and capital gains tax effects to check.

Illustration only.

Imran is one of three equal partners in an engineering firm. At his death his capital account shows £300,000. Revaluing the firm’s workshop and goodwill adds £450,000, of which his third is £150,000. He also has a £200,000 loan account and personally owns a yard the firm uses, worth £600,000.

  • Partnership interest: £300,000 plus £150,000 equals £450,000, relieved at 100% within his allowance.
  • Loan account: £200,000 is a debt owed to the estate, with no relief.
  • Yard: £600,000 at 50% relief, leaving £300,000 chargeable.

What else do partners need to check?

From 6 April 2026, 100% relief is capped at £2.5 million of combined business and agricultural property, with 50% above that (GOV.UK). If there is no partnership deed, the Partnership Act 1890 dissolves the firm on a partner’s death and the personal representatives are entitled to the value of the share (IHTM25101). Any clause that obliges the estate to sell and the survivors to buy can remove relief altogether, as explained in business relief and buy and sell agreements. Claims for salaried partners are referred to HMRC’s Technical team (IHTM25250). Executors claim relief on form IHT400 with schedule IHT413, and gifts of a partnership share during life are subject to the clawback rule if the donor dies within seven years.

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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.