Restrictions to IHT replacement property relief
29th May 2026
Posted in Articles, IHT by Andrew Marr
The issue
Replacement property relief can be available in a case where an asset which qualifies for business property relief (BPR) is disposed of and then a new qualifying asset is acquired. To recap, certain assets (such as shares in qualifying trading companies) qualify for 100% BPR. As of 6 April 2026, each individual can attract 100% BPR up to a £2.5m allowance, which is completely free from IHT on death. Any value over the £2.5m limit attracts relief at a reduced rate of 50% (meaning there is an effective IHT rate of 20% over £2.5m). The benefit of the replacement relief is that an individual can take advantage of the ownership period of the previously held asset, so that the two-year ownership requirement is relaxed for the new asset. In more detail, the key points of the rules are as follows:
- The new asset needs to replace the old asset, which means that there must be some connection with the funds derived from the old asset and those used to acquire the new asset.
- At the relevant time (e.g. death) the old asset and the new asset had been held for at least two out of the previous five years.
- Both the new and old asset satisfy the conditions to be relevant business property (e.g. share in a trading company).
In simple terms, this can be seen as a BPR rollover provision whereby new assets can take on the ownership period of previous assets.
However, there is also a strange and much debated ‘restriction clause’ which, taken literally, can have a dramatic effect.
The restriction clause
This says that “relief under this Chapter shall not exceed what it would have been had the replacement or any more of the replacements not been made”.
Example
In March 2023 Jim bought some shares in Tradeco 1 for £500,000. In April 2024 he sold these shares for £1m and then acquired some shares in Tradeco 2 (using Tradeco 1 proceeds) for £700,000. In July 2025 he died when the Tradeco 2 shares were worth £1m. In the meantime, Tradeco 1 had been forced into insolvent liquidation and was worthless on the date of Jim’s death. If we take the wording of the restriction clause literally, then no BPR would be available in respect of the Tradeco 2 shares because there would have been no relief available for the worthless Tradeco 1 shares at the date of death, had the replacement not been made.
The above interpretation is rather extreme and thankfully even HMRC are likely to accept in the above example that Tradeco 2 should benefit from full BPR. In their examples, they do not tend to focus on the value of the old assets which supports this view.
AIM portfolios
From 6 April 2026, AIM shares only qualify for 50% BPR relief. Up to 5 April 2026, the relief on AIM shares had been 100%. This led many people to replace AIM shares with ‘fully fledged’ BPR shares prior to 6 April 2026 in the hope that replacement property relief would mean that the new shares were fully qualifying on acquisition. However, the guidance is clear that HMRC does not agree with this view because it says that the restriction clause will limit the new shares to 50% relief after 5 April 2026, until the new shares have themselves been held for two-years.
Forbes Dawson view
The original intention behind the restriction clause was probably to stop relief for the old asset (for example quoted shares with a controlling interest which only attracted a 50% BPR rate) being converted into a higher rate for a new asset (for example unquoted shares in a trading company). I suppose that arguably the position with AIM shares is similar and so HMRC’s position is easy to understand. However, there may be a purposive argument that replacements before 6 April 2026 should ‘bank’ the full BPR relief which would have been available to the AIM shares at that time. Such an argument will only be relevant for those who die (or make other transfers of value) in the two year window from replacing their AIM shares.
