IHT and Balfour: Is this still relevant post-Budget?

Lord Balfour died in 2003, but over 20 years later the effects of the business property relief (BPR) claim made by his executors still impacted inheritance tax (IHT) planning for others. 

Lord Balfour held his entire estate within a partnership. A claim was made for BPR over the whole partnership interest, which was ultimately agreed by the Upper Tier Tribunal (UT). The UT first accepted that Lord Balfour was running the estate as one composite business, rather than several separate trading and investment activities. It then examined the business as a whole to see if it was principally trading or investment in nature.  

This assessment was based on five tests: 

• Turnover
• Net profit
• Capital employed
• Employee time
• The overall feel of the business 

Not all of these tests had to fall on the side of trading for the business to be trading, and more weight was given to some of these markers than others.

This decision was particularly helpful for diverse estates, which often include a mixture of trading and investment activities. Many estates over the years have let out their surplus farmworkers’ cottages and older agricultural buildings, as farming techniques have evolved, reducing reliance on labour.

While the overall business must remain wholly or mainly trading as described above, the value of the rental properties is sheltered from the 40% IHT.

In the October 2024 Budget, the government announced that business and agricultural property reliefs would be restricted from April 2026. The total value of otherwise unrelievable assets will no longer be completely sheltered. As a result, some now question if such planning is still worthwhile.  

However, 50% relief is still a positive result, assuming that the combined £1million allowance has already been used. As such, Balfour partnership structures remain a useful planning tool.

To qualify for IHT relief under the Balfour tests, the requirement is that the business overall is to be “wholly or mainly" trading. While this has not been defined in legislation, it has historically been taken to mean at least 50%.

There have been discussions that this test may be brought in line with other capital gains tax (CGT) reliefs, so that instead, 80% of the business would need to be trading in nature. However, given the changes already announced, it’s hoped that the government would not look to increase this trading limit in the future.

In addition to the advantages that the Balfour partnership structure can bring, the introduction or use of a partnership may provide further benefits, such as opportunities for succession planning, debt financing, liability protection and tax reliefs in the event of sales or development of land.

It cannot be denied that the reduction in IHT reliefs is going to have a significant impact on many landowners, but opportunities are still available to potentially reduce th increased exposure.

If this is something you would like to discuss with us, please do get in touch with your usual contact or one of the contacts listed.

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