Business relief is only available if the person making the transfer owned the business or shares throughout the two years immediately before the gift or death, under section 106 of the Inheritance Tax Act 1984. Sections 107 to 109 relax this where the property replaced earlier business property, was inherited, or passed on an earlier transfer that qualified for relief, and those relaxations are what usually rescue a claim after a sale, an inheritance or an incorporation.

What does the two year rule actually require?

Section 106 of the Inheritance Tax Act 1984 (IHTA 1984) is one sentence: property is not relevant business property unless it was owned by the transferor throughout the two years immediately preceding the transfer. GOV.UK puts it simply: relief is only available if the deceased owned the business or asset for at least two years before they died, and for a gift, for at least two years before the date it was given.

HMRC reads “owned” as beneficial ownership in most cases, including property in a trust where the person had a qualifying interest in possession. For a trust without such an interest, legal ownership by the trustees counts. A residuary beneficiary of an unadministered estate is treated as owning the business property in it (IHTM25302).

The test applies to the business or shareholding as a whole, not to each asset. IHTM25342 confirms that capital and assets introduced into a business less than two years before the death still count towards its value if they were used in the business at that date. HMRC also accepts that the nature of the business can change during the two years, provided there was a business throughout (IHTM25303). Separate two year use tests apply to excepted assets and to property used by your company; see excepted assets and property used by your company.

How does replacement property count?

Section 107(1) treats the two year test as met if the property replaced other property and the two together, plus any earlier property they replaced, were owned for periods totalling at least two years within the five years before the transfer. Each item must have qualified as relevant business property, apart from the ownership test, when it was replaced.

HMRC requires “some tangible connection or link” between the old and new property (IHTM25311). Selling business A and buying business B with the proceeds is a replacement. Spending the proceeds on other things and later borrowing to buy B is not, and nor is giving A away and buying B from other funds.

Section 107(2) caps the relief at what it would have been without the replacement. This stops someone buying much more valuable business property shortly before death. HMRC’s example at IHTM25313 shows Tunde selling AIM shares worth £500,000 on 7 February 2026, buying unlisted shares for £600,000 and dying on 9 August 2027 when they are worth £800,000. Relief is limited to £333,333, the 50% relief that the AIM shares would have attracted, apportioned to the new value. Had he survived to 7 February 2028, full relief would have been available. For more on AIM, see business relief on AIM shares.

Separately, section 107(4) means that unquoted shares received on a reorganisation, share exchange or takeover that is identified with the old shares under sections 126 to 136 of the Taxation of Chargeable Gains Act 1992 inherit the old shares’ ownership period (IHTM25314).

What if the business or shares were inherited?

Section 108 sets two rules. If you inherited the property on someone’s death, you are treated as owning it from the date of death. If you inherited it from your spouse or civil partner, you are also treated as owning it for any period your spouse or civil partner owned it, however long you were married (IHTM25321). HMRC also accepts that a surviving spouse who inherits cash from the sale of the deceased spouse’s business property and reinvests it in business property gets the benefit of section 107(1).

Section 109 covers successive transfers. Property is treated as meeting the two year test if it qualified for relief on an earlier transfer, passed to the current transferor or their spouse on that transfer, and would otherwise be relevant business property now, provided either the earlier or the later transfer was on a death (IHTM25331). Section 109(3) restricts relief proportionately where only part of the property’s value was transferred the first time.

Illustration only. Owen inherits his father’s shares in the family company, which his father had held for 20 years and which qualified for relief. Owen dies 14 months later. Section 108 only treats Owen as owning the shares for 14 months, which is not enough. Section 109 rescues the claim, because the earlier transfer was on death and qualified for relief.

What happens after a business is incorporated?

When a sole trader or partnership transfers the business to a new company in exchange for shares, the shares are new property. Section 107(1) treats them as replacing the business, so the periods of owning the business and the shares are added together. Section 107(3) then says that changes resulting from the formation, alteration or dissolution of a partnership, or from a company controlled by the former owner acquiring the business, are disregarded when applying the section 107(2) cap. In practice the incorporation does not restart the clock or reduce relief.

Three related points:

  • Contracts for sale. Section 113 normally denies relief on business property subject to a binding contract for sale, but excepts a sale of a business to a company that will carry it on, made wholly or mainly for shares or securities in that company. An incorporation agreed but not completed at death does not lose relief for that reason.
  • Premises kept outside the company. A building owned personally and used by the new company only gets 50% relief under section 105(1)(d). HMRC accepts the two year use test is met by adding the time used by the old business to the time used by the company (IHTM25223).
  • Gifts before death. Section 113A(6)(b) treats shares issued to a recipient in exchange for a gifted business as the original property, so a recipient who incorporates the business does not lose relief on the donor’s death.

For capital gains on incorporation, see incorporation relief.

Does the person receiving a gift need to own it for two years?

No, but they must keep it. For a lifetime gift, the two year test is applied to the donor at the date of the gift. If the donor dies within seven years, section 113A requires the recipient to have owned the original property from the gift until the donor’s death and for it still to be relevant business property, ignoring section 106. GOV.UK says the recipient must keep the business as a going concern, though they can replace assets of equal value for use in the business. Under section 113B a sale is not fatal if the whole proceeds are reinvested in qualifying replacement property within three years, on arm’s length terms (IHTM25369).

What mistakes come up most often?

  • Selling a business, holding the cash, then buying a new one with borrowed money. Without a tangible link, section 107 does not apply.
  • Assuming inherited property carries the deceased’s ownership period. Only a spouse or civil partner gets that under section 108; anyone else starts from the date of death unless section 109 applies.
  • Buying shares in a family company within two years of death. A fresh purchase with new money does not qualify.
  • Answering box 1 of form IHT413 “no” and not explaining which relaxation applies. HMRC officers are told to check the rules in that case (IHTM25012).

For the wider rules, see Inheritance Tax business relief.

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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.