Business Property Relief from April 2026: eligibility, the £2.5m allowance, and where STL portfolios stand

In short: From 6 April 2026 a combined £2.5 million allowance for Agricultural Property Relief and Business Property Relief gives 100% IHT relief on qualifying property, with any excess relieved at 50%. The allowance is transferable between spouses and civil partners, so a couple can access up to £5 million of qualifying property at 100% relief on second death. For most STL owners the more important question is eligibility: standard short-term letting is treated as an investment business and does not attract BPR, whether or not the £2.5m allowance is in play.

Two questions matter for the inheritance-tax position of a short-term let portfolio: does the property qualify for BPR at all, and (if some qualifying business assets are held) how does the new £2.5m combined allowance work? We take them in that order.

Question one: does the STL property qualify for BPR?

For most owners the answer is no. Business Property Relief has never applied automatically to residential letting. The long-standing HMRC position is that a business consisting "wholly or mainly of holding investments" does not qualify (s.105(3) IHTA 1984). Standard short-term letting has been treated as an investment business for BPR purposes for many years, including the years when the FHL income-tax and CGT regime was in place.

For a small number of highly-serviced FHL operations, there was always a narrow argument that the level of service made the activity a trade rather than an investment. Tribunals have been consistently unwilling to accept that argument in most fact patterns. Three case names are worth knowing:

• Personal Representatives of Grace Joyce Graham v HMRC [2018] UKFTT 306 (TC) — one of the few operator wins. The First-tier Tribunal accepted the level and quality of services provided (including welcomes, meals available, cleaning, laundry, on-site engagement) took the operation over the investment-vs-trade line.
• Ross v HMRC [2017] UKFTT 507 (TC) — went the other way on facts that many operators would have thought helpful. The Tribunal found that despite significant services, the letting business was still wholly or mainly an investment business.
• Personal Representatives of Green v HMRC [2015] UKFTT 334 (TC) — similarly denied relief on a serviced-let operation.

The pattern from the case law: services need to be exceptional in scale and character (approaching hotel-style operation) to displace the investment characterisation. The abolition of the FHL income-tax regime from 6 April 2025 did not itself change the BPR analysis — the investment-business exclusion applied before and applies now. Nothing about the FHL label leaving the income-tax code removed a BPR entitlement, because the entitlement rests on the character of the activity, not on the FHL label.

Incorporation does not fix eligibility. Moving a property investment business into a limited company creates shares, but the shares of a property investment company are themselves excluded from BPR by s.105(3). A genuine change in the character of the activity — not just its structure — is what BPR requires.

Question two: how does the £2.5m allowance work for the assets that do qualify at 100% relief?

The £2.5 million allowance concerns qualifying assets that would attract 100% relief under APR or BPR — for BPR, generally interests in a trading business or unquoted shares in a trading company, subject to the ordinary two-year minimum ownership period and other conditions in s.106-107 IHTA 1984. Some categories of BPR-eligible property attract only 50% relief in the first place (broadly, controlling interests in quoted companies and land/buildings used by a partnership or controlled company), and those items are not covered by the £2.5m 100%-relief allowance in the same way. Check the specific asset's underlying relief rate before applying the cap arithmetic to it.

For the qualifying-at-100% pool:

• Combined APR + BPR at 100% relief up to £2.5m: full 100% relief.
• Excess above £2.5m: relieved at 50% — meaning IHT on the excess is charged at an effective 20% rate (i.e. the standard 40% IHT rate applied to the 50% of value that is not relieved). This is a marginal-relief illustration, not a completed estate-tax computation.
• Transferable to spouse or civil partner: where the first-death allowance is not fully used it can be claimed on second death, so a couple can access up to £5 million at 100% relief. The Government confirmed the transferability position after earlier commentary suggested it would be non-transferable (HMRC — Reforming inheritance tax business and agricultural property reliefs).

For an STL owner whose only business asset is the letting portfolio, the allowance is largely irrelevant — the properties do not qualify. For an owner with genuine trading assets held alongside, the allowance is real and worth planning around.

Planning issues to assess

Each of the following requires case-specific analysis of control, retained benefits, CGT, IHT charges and affordability. None is generally effective without that analysis; each may be right for a specific client.

Lifetime gifting. Straight gifts to individuals are potentially exempt transfers, taking seven years to fall out of the estate. Section 260 TCGA 1992 holdover relief is potentially available on transfers that are chargeable transfers for IHT — this includes many transfers into discretionary trusts. Eligibility requires separate checks of the transfer, the trust terms, the settlor-interest and settlor-benefit CGT restrictions (which are distinct from the IHT reservation-of-benefit rules), the settlor's residence position, and the trust's ongoing tax profile (10-year and exit charges, income tax on trust income). Not retaining a personal benefit for IHT purposes is not, on its own, a sufficient CGT checklist — the CGT restrictions have their own tests. HMRC's HS295 sets out the CGT position and clawback rules. Section 165 TCGA business-asset holdover on gifts to individuals still requires the underlying business to be a qualifying trade — for standard STL, that remains hard to establish.

Trust structures. Discretionary trusts and interest-in-possession trusts have different IHT, CGT and income-tax profiles. The 10-year anniversary and exit charges on relevant property trusts are real ongoing costs. Trusts are useful in some family situations and expensive in others.

Incorporation. Where the operation is genuinely trade-like (aparthotel, staffed serviced accommodation, meaningful concierge services), incorporation may support a stronger BPR argument for the shares. Where the operation is standard STL, incorporation does not solve the BPR eligibility question and adds SDLT/LBTT/LTT and CGT costs on the transfer.

Life cover in trust. A whole-of-life policy written into trust can provide liquidity to pay any IHT liability without forcing a disposal. Whether premiums fit within normal expenditure out of income, the £3,000 annual exemption, or the seven-year gifting rules depends on the client's income and lifestyle — a review is needed rather than an assumption.

Documented, evidenced trading activity. For the small subset of businesses that genuinely operate as serviced accommodation, contemporaneous evidence of the services provided is what supports a BPR argument on the shares. This is a live, fact-specific question — not a policy assertion.

What operators should do

1. Get a current IHT projection. If your last review pre-dates the Autumn Budget 2024 or the £2.5m cap confirmation, it is out of date.
2. Do not assume BPR will apply to the STL properties themselves. The default position is that it does not.
3. Where you hold BPR-qualifying assets alongside the STL portfolio, model the £2.5m allowance and the transferable position between spouses.
4. Assess the planning options as a package, not as a shopping list of individually appealing tools.

The right answer varies with the shape of the estate; the right time to have the conversation is well before the assets need to move.

Book a free consultation to review your position.

Sources: House of Commons Library — Changes to agricultural and business property reliefs (CBP-10181); HMRC — Inheritance Tax Manual IHTM25131 onwards (business relief); TLT LLP — Government raises APR and BPR cap to £2.5m from April 2026; ATT — Government announces changes to new APR/BPR restrictions from 6 April 2026; Autumn Budget 2024.