Practical implications of inheritance tax changes for business owners

This insight was originally published for use in the ‘Business Time in Essex’ magazine in collaboration with the Essex Chambers of Commerce.

Inheritance tax (IHT) liabilities

Inheritance tax (IHT) liabilities will be significantly impacted by the major changes to business property relief (BPR) announced in the Autumn Budget 2024. Further changes were announced in the Autumn Budget 2025 and just before Christmas.

The changes take effect from April 6 2026, so business owners need to understand how this impacts them and prepare thoroughly.

Currently, businesses that qualify for BPR can pass it on to the next generation, free from IHT. This means the business does not need to be sold or broken up to cover tax bills.

However, from April 6 2026, BPR will be capped at £2.5 million per individual. Any business value above this amount will only qualify for 50% relief, meaning up to 20% IHT is due on the excess. For example, if a business owner passes on a business worth £5 million, the relief will work as follows:

• the first £2.5 million is fully exempt under BPR;
• the remaining £2.5 million qualifies for 50% relief, meaning £1.25 million is still taxable;
• at an IHT rate of 40%, this results in a £500,000 IHT bill.

The Government has justified these changes by stating ‘it is not fair or sustainable for a very small number of claimants each year to claim such a significant amount of relief’.

Concerns for business owners

A key concern for business owners is how their estate will pay the IHT without selling the business. Possible solutions include taking out a life insurance policy written in trust can help cover the IHT liability, business owners factoring potential tax costs into their planning and arranging a business valuation: a third-party valuation will determine the likely tax exposure.

There are no changes to the tax treatment of lifetime gifts. Assets gifted more than seven years before death remain exempt from IHT. This means business owners may consider transferring ownership during their lifetime to reduce future tax liabilities. However, this should be balanced against:

• capital gains tax (CGT) implications: transferring business assets may trigger CGT, although reliefs such as holdover relief may be available;
• control over the business: gifting shares or business interests may impact decision-making and operational control.

In the same way as for the standard IHT nil-rate band, any unused BPR allowance is transferable between spouses or civil partners on the death of one of them.

Alternative structures such as family investment companies or trusts may help manage succession and IHT liabilities under the new rules. These structures offer greater control over how assets are passed on while potentially reducing the overall tax burden.

How we can help

By taking proactive steps and seeking professional advice, business owners can protect their businesses and ensure a smooth transition for future generations. For tailored tax planning advice, please contact me or another member of our tax team.