Business Relief and Inheritance Tax

Change is coming. If you own a family business, you will soon come under the cold shadow of inheritance tax – thanks to the changes to business relief. The new rules come into force in less than a year. Clients can take mitigating action and manage their liability, even if they can no longer sidestep it entirely. 

A long standing relief from Tax…

Inheritance tax payments, IHT for short, will contribute £8.3bn to Government coffers this year. It’s a drop in the ocean for them (0.7% of tax, 0.3% of national income) but a vast sea for those who must pay it. 

There are around 46,000 businesses in the UK with at least 50 employees. And the industrious, ingenious people who run them will soon bear a greater IHT burden, thanks to the removal of business relief, from 6 April 2026. 

You’ll know that IHT is levied at 40% on the value of an estate above £325,000. Individuals can transfer their unused threshold to a surviving civil partner or spouse – getting them to £650,000 before the Government levies IHT. There are ways of nibbling further at this liability, like giving to charity. 

Given such numbers barely scratch the surface for business owners, business relief has been a long-standing, valuable tool for managing IHT liabilities. Introduced in 1976, it sought to help a family-owned business survive the death of its owner – continue as a trading entity, without being broken up to meet an IHT liability. It enables the shares of a company to be passed to the next generation free from inheritance tax – provided they own the shares for at least two years. 

…Vanishing by 2026

The big change is the cap to business relief: after 6 April 2026, the first £1m of business property continues to receive 100% relief but there is just 50% relief on amounts above that sum. 

Business relief for unlisted companies falls to 50% – and the £1m allowance does not apply. 

This is a material issue. Analysis suggests that the new changes could even be counterproductive for the Government: a £1.25bn net fiscal loss, 125,000 job losses and a reduction in reduce economic of £9.4bn.  

It’s hard to see the Government going back on its plans though – especially when they’ve planted their flag on tax rises. 

In the last quarter of 2024, there were 402 mergers and acquisitions of companies valued at £1m and above in the UK. We might see more of this in future. 

Managing the reformed business relief: an action plan 

Individuals can transfer shares on their own to a trust before 6 April 2026 and benefit from the current rules. Caveats apply: if they die after 5 April 2026 and within seven years of the transfer, the new rules still apply. 

However, those who wait until after 6 April 2026, will run the risk of incurring lifetime IHT on trusts exceeding £1 million. That’s not all. They may well incur IHT if they die within seven years. 

A common option for managing IHT is to arrange life insurance cover. This is often placed in trust, outside of their estate, so it is not subject to probate. This has the advantage of giving descendants a ready sum with which to pay an IHT bill, and quickly. 

Here, the Government have thrown business owners a life ring of sorts: owners can pay their IHT liability on business property over ten annual instalments, interest-free from April 2026. The irony will not be lost on business owners, given government action placed them at risk of drowning in the first place. 

Aside from that, we strongly encourage individuals to regularly review their plans and their wills. For example, reviewing how much each spouse holds in qualifying assets.  

And they would be well advised to spread long-term savings and investments more broadly, and not just keep them in the business. Financial planning and coaching play an active role here. 

For instance, an integral part of the planning process is discussing with our clients what their future life looks like. What do they want to do, and when? How much does it cost? And how can they fund it?  

This begets deeper considerations: To what extent can they extract capital from the business, to diversify away from it, and make the most of tax-free allowances?  

The latter almost always include ISAs and pensions – for both Individuals and their spouses – and sometimes include riskier vehicles – like venture capital trusts and enterprise investment schemes. The goal is to allocate to investments that can deliver the desired results over the desired period, wrapped suitably to protect them from the chill of tax. 

We also engage with individuals to manage sequence risk, which is the necessity of matching the maturity of investments – or the regular income they deliver – with personal liabilities. In other words, they should get their income when they need it.  

The golden rule is that we recommend for clients to take professional advice as early as possible, to manage their investment holistically – not just in the business – and mitigate their liabilities. 

If you or your clients worry they’re condemned to selling their business to meet the liability, there may well be a way out, thanks to imaginative financial planning. We would be delighted to discuss how best to solve these problems, on 020 7467 2700 or via hello@firstwealth.co.uk. 

This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.