Inheritance Tax: What Business Owners Need to Know

What is Inheritance Tax?

IHT is a tax levied on an individual’s estate at death. The tax is charged on the value of assets owned at death, after deducting available allowances. The current standard rate is 40% on the amount of the estate above the nil-rate band, which is currently £325,000 (frozen until at least 2028).

IHT applies to a broad range of assets, including:

• Property – residential and commercial.
• Investments and bank accounts.
• Business interests (subject to relief rules).
• Personal possessions (e.g., art, jewellery).

Without planning, beneficiaries could see a large portion of their inheritance remitted to HMRC before distribution. Recent figures show that HMRC collected £1.2 billion in Inheritance Tax in just the first two months of the tax year, illustrating its magnitude.

Recent and upcoming IHT reforms

Freezing of Thresholds

The nil-rate band and related reliefs have been frozen whilst asset prices have risen, meaning more estates are caught by IHT.

Business and Agricultural Relief Reforms (April 2026)

Historically, qualifying business assets could be passed on with 100% relief from IHT under Business Property Relief (BPR). However, legislative changes taking effect from 6 April 2026 will fundamentally alter this regime:

• Full relief remains only for the first £1 million of combined qualifying business and agricultural assets.
• Assets above this threshold will qualify for only 50% relief, giving an effective 20% tax rate on the excess.

These reforms mean that large family businesses —particularly those with substantial retained profits or capital value — could face significant tax charges on succession unless mitigated effectively.

Inclusion of Pension Funds in IHT (April 2027)

Another major reform that will affect succession planning is the inclusion of previously exempt pension funds in the IHT net from April 2027. Under current rules, unused pension savings are generally excluded from IHT, making pensions a highly effective wealth-transfer vehicle. There form will change this by bringing pension pots into the estate for IHT purposes.

This is a substantial shift from decades of UK tax policy and requires business owners and high-net-worth individuals to rethink how pensions fit into their tax plans.

IHT and Business Owners: Specific Challenges

Business owners face unique challenges when it comes tosuccession and estate planning:

For a business owner, a significant portion of wealth is often tied up in:

• The operating business itself.
• Commercial property used in the business.
• Retained profits held in the company.

While BPR traditionally exempted qualifying trading assets from IHT, cash or investment holdings inside the trading company can jeopardise relief if they cause the company to be classified as an “investment company.”

Risks from Reform

The forthcoming reforms mean that business owners must now plan for:

• Potential IHT charges on business assets exceeding £1m.
• Treating pensions (including SSASs and SIPPs) as part of the estate for IHT.

These shifts have prompted concern in the UK small-business community, with industry groups warning that substantial tax liabilities could force the sale of companies and family businesses.

Core Strategies for Mitigating Inheritance Tax

Effective IHT planning is about balancing tax mitigation with legal, practical succession objectives. The following strategies are widely used in the UK context.

Business Property Relief (BPR)

BPR remains one of the most important reliefs for businessowners, despite reforms.

To qualify for BPR:

• The business must be a trading company (not primarily investment-oriented).
• Assets must be held for at least two years prior to death.
• Relief applies to unlisted trading companies, sole trader businesses, partnerships, and, subject to conditions, AIM-listed trading shares.

From April 2026:

• The first £1m of qualifying business assets will still receive full relief.
• Amounts over this will receive only 50% relief.

This cap means that business owners need to plan ahead to maximise relief before the reforms take effect.

Gifts and Allowances

Annual exemptions allow small gifts each year free of IHT. Larger gifts may become exempt if the donor survives seven years (subject to taper relief).

Trusts

• Trustees hold assets on behalf of beneficiaries, often reducing the estate’s taxable value.

However, trust rules are complex, and recent reforms have limited their use in certain circumstances (e.g., business relief caps now apply to trusts created after 30 October 2024).