Family Business Issues: Changes to Inheritance Tax Business Property Relief

Prior to April 2026 it was possible to transfer ownership of a family business, whether on death or during lifetime, without incurring any inheritance tax liability.  BPR was available for any interest in a business (whether a partnership, shares in a private limited company or sole trader), provided that the business was not mainly an investment business without any cap.   It was therefore a very valuable relief for family business owners.  It also led many business owners to hold onto their businesses until death, when their beneficiaries would also benefit from an uplift in value for capital gains tax purposes.

From April 2026 the government has restricted the availability of BPR.  Only the first £2.5million of business property will qualify for relief at 100%, with 50% relief being given for the remainder (i.e. taxed at 20%).  If a business is owned by a married couple, they can pool their allowances to give an overall value of £5million that can be left with 100% relief.  However, for many business owners, this can still lead to a substantial inheritance tax bill.  This will be exacerbated from April 2027 when changes to the Inheritance Tax treatment of pension funds are due to come into effect.

How to pay the inheritance tax can be a real concern.  Whilst the inheritance tax on a business can be paid in annual instalments over a ten year period, this can still put a significant burden on the cash flow for the business or family.

Rather than retain business interests until death, many business owners are looking at transferring some or all of their business during their lifetime to bring the value of their interest  below the £2.5million.  This can spread the value of the business over a number of individuals or trusts each having their own £2.5million allowance for BPR.  It can also be a good way of incentivising and developing those coming up through the business.

Trusts can be useful if the next generation are not ready to take control or if there are other concerns about them directly owning the business or if there is a need to keep control of the business to a smaller number of individuals.

When making changes to the business, it is important ensure that the share structure is effective.  Share could be voting or non-voting and include rights to dividends and/or capital on a sale or winding up of the company.  A shareholders agreement may also be needed. 

It is important to make sure that any Wills are reviewed and up to date following the Inheritance Tax changes.  Wills should be structed to make best use of any BPR and to avoid unnecessary Inheritance Tax charges.  They can also protect assets for the family.

You should take advice on your Inheritance Tax exposure, review your existing business structure and documents, and ensure your Wills and Lasting Powers of Attorney are up to date. You may also wish to consider lifetime gifting, either directly or through trusts, as part of your wider succession planning.

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