Running a business is no small feat, and neither is planning for what happens after you’re gone.
For UK owners of a business, inheritance tax (IHT) can quietly chip away at the legacy you’ve worked hard to build.
But with foresight and the right strategies, you can minimise the tax burden and secure your wealth for future generations.
(Read Time: Approx. 7 minutes)
Topics Discussed:
- Practical strategies to reduce inheritance tax exposure as a business owner
- The importance of succession planning, gifting, and appropriate legal structures
1. Business Property Relief and Upcoming Rule Changes
What is Business Property Relief (BPR)?
Business Property Relief (BPR), previously known as Business Relief, is one of the most effective tools for reducing IHT.
It can offer up to 100% relief on the value of qualifying business assets such as shares in unlisted companies, sole trader businesses, or partnerships.
To qualify, these assets must be held for at least two years before death or transfer.
Who Qualifies and What Doesn’t?
The business must be trading, not passive. HMRC’s “50% trading test” requires at least half of the business activity to involve actual trade—not investment.
So, a property development company may qualify, but a buy-to-let operation generally would not.
Assets such as AIM-listed shares, even in minority holdings, are also eligible.
Changes from April 2026
From April 2026, BPR will become less generous.
The government will cap 100% relief on combined agricultural and business property. Any value above that will only receive 50% relief.
Planning ahead is critical to retain tax efficiency before these changes come into force.
Claiming BPR After Death
To claim BPR after death, executors must submit HMRC forms IHT400 and IHT413 within six months of death.
Any delays could result in interest charges and missed opportunities for relief.
2. Shareholder Agreements and Legal Documentation
The Importance of Wills and Shareholder Agreements
Without a will or shareholder agreement, the fate of your business interests could be left to the rules of intestacy.
This may mean your shares pass to unintended beneficiaries, potentially causing disruption to your business and unnecessary tax exposure.
A will ensures your business passes to the people you choose, and a shareholder agreement provides continuity and protection.
Don’t Forget the Chattels
Chattels—such as jewellery, heirlooms, or artwork—can often cause conflict during estate administration.
These items may carry both financial and sentimental value. If not specifically listed, disputes may arise among family members.
Where appropriate, include specific gifts in your will or use a letter of wishes, which allows for flexibility while indicating your intent.
3. Gifting During Lifetime and the Tax Implications
Capital Gains Tax on Gifting
Gifting business assets or property during your lifetime can be a smart strategy for reducing IHT, but it’s not without immediate tax implications.
Even when no money changes hands, HMRC views gifting as a “disposal” at market value, potentially triggering Capital Gains Tax (CGT) if the asset has appreciated.
For instance, gifting a property worth £800,000 that was purchased for £250,000 would result in a £550,000 capital gain.
At a CGT rate of 28% for residential property, that’s a tax bill of £154,000—due within 60 days of the gift.
Stamp Duty Land Tax and SDLT Pitfalls
If there’s a mortgage on the property or it’s transferred to a connected company, SDLT can also apply—even though it’s a gift.
And when companies are involved, a 3% surcharge is added.
In some cases, the SDLT could be as high as 15%, particularly under the ATED regime if the property isn’t used for lettings.
Inheritance Tax and the Seven-Year Rule
Gifts can qualify as Potentially Exempt Transfers (PETs), escaping IHT if the donor survives for seven years.
However, if the donor continues to benefit from the gift—such as living in a house rent-free—it becomes a “gift with reservation,” and the value remains in their taxable estate.
4. Using Family Investment Companies and Trusts
The Role of Family Investment Companies (FICs)
A Family Investment Company is a bespoke structure allowing wealth to be retained within a company and passed to future generations tax-efficiently.
You can retain control via voting shares, while growth accrues to family members, helping to manage long-term inheritance tax exposure for your business.
Trusts in Inheritance Tax Planning
Trusts offer protection, flexibility, and long-term control over assets.
Discretionary trusts let you decide when and how beneficiaries receive funds.
Bare trusts give immediate rights to beneficiaries, and interest-in-possession trusts provide income for one person before the capital passes to others.
Tax Implications for Trusts
Trusts do carry tax responsibilities.
There’s a 6% inheritance tax charge every ten years on the value above the nil rate band (£325,000) and capital gains tax at 20–24% on profits exceeding £1,500 annually.
Still, over several generations, these costs may be far less than paying 40% IHT repeatedly.
Generation Skipping Through Trusts
Trusts can also be used to skip a generation.
By passing wealth directly to grandchildren, you reduce the number of times HMRC takes a slice.
A trust can now last up to 120 years, enabling smart, generational planning with flexibility built in.
5. Life Insurance as a Practical IHT Solution
How Life Insurance Offsets IHT
One of the most practical tools in estate planning is a life insurance policy written in trust.
The payout remains outside your estate and goes directly to your beneficiaries—helping them pay the IHT bill without needing to sell property, business shares, or valuable heirlooms.
Why Write It in Trust?
Writing the policy in trust ensures it doesn’t inflate the value of your estate and delay the probate process.
Depending on your circumstances, a discretionary or interest-in-possession trust may be suitable.
The key is to match the policy size to the expected IHT bill and structure it to ensure the funds are accessible when needed.
6. Business Succession Planning
Early Planning Is Essential
Succession planning shouldn’t begin at retirement—it should evolve with your business.
Whether you plan to hand the reins to your children or sell to a key employee, clearly documenting your intentions is crucial.
Avoiding Challenges from HMRC
Transfers that appear insincere—where control hasn’t truly shifted or where a business is being run down—can be challenged by HMRC.
That can lead to the loss of BPR and higher tax bills.
A robust plan should identify successors, outline training, and be reflected in your shareholder agreements and will.
More Than Just Tax
Succession planning also ensures business continuity, protects jobs, and preserves family unity.
It avoids confusion, disruption, and disputes during emotionally difficult times.
7. Combining Gifting, Generation Skipping and Asset Management
Using Annual and Lifetime Exemptions
You can gift up to £3,000 per year without it affecting your IHT liability.
Unused exemptions can carry forward one year.
Additional exemptions apply for wedding gifts—up to £5,000 for a child and £2,500 for a grandchild.
Charitable Giving and Rate Reduction
Leaving at least 10% of your net estate to charity can reduce your business’ inheritance tax rate from 40% to 36%.
This not only benefits causes you care about but also reduces the tax burden on your family.
Skipping a Generation
By passing assets directly to grandchildren, you can reduce the number of times IHT is applied.
For example, instead of assets being taxed at 40% each time they move from parent to child, you only pay once.
A deed of variation—executed within two years of a death—can also redirect an inheritance to skip a generation and preserve more of the estate.
Don’t Overlook High-Value Personal Assets
Designer handbags, fine art, and classic watches are now recognised as appreciating asset classes.
A Hermès handbag, once purchased for £10,000, may now be worth £250,000.
These should be valued and included in your estate plan, as they can significantly affect your taxable estate.
Summary
Inheritance Tax planning for business owners is not a luxury—it’s a necessity.
Whether you’re planning to gift property, set up a trust, pass the business on, or simply protect your family’s future, the decisions you make today will shape your legacy tomorrow.
At Tax Expert, we specialise in helping UK business owners protect their estates and plan efficiently.
Fill out our form here for any questions, give us a call at 01772 788200, or message us on our WhatsApp for out of office hours.
Kind regards,
Ilyas Patel