Business Relief and Charitable Exemption

On an estate the beneficiaries have executed a deed of variation to direct 18% of the Residuary Estate to a charity. The Residuary Estate is defined in the DOV in the usual way ie estate after payment of debts funeral expenses etc. HMRC are refusing to allow the charitable exemption on the whole of the 18% because there is also Business Relief applicable on a proportion of the estate. Their approach is to deduct the Business Relief from the net estate and then allow the charitable exemption on 18% of the remaining amount. Their argument is that the charity should be treated as receiving a proportion of the property that qualifies for BPR as part of their 18% share regardless of whether the estate will actually be administered in that way. They are not quoting any legislation but say that our method would be inequitable.
Is their approach correct?

If the business property is part of the Residuary Estate then HMRC are right. The IOV should have appropriated the BP to the non-charitable residuary beneficiaries and other assets to the charity, if these are equal to or greater in value than 18% of total residue. If still in time arguably that could yet be done but the actual wording of the IOV is important in deciding whether that would be a double variation (IHTM35081-6)

Jack Harper