The long-standing ability to pass on family businesses without worrying about Inheritance Tax (IHT) is coming to an end on 6th April 2026. For as long as I can remember, Business Property Relief (BPR) has allowed individuals to transfer trading businesses to the next generation free of IHT, allowing family-owned businesses to carry on from generation to generation.
But the government’s recent budget has introduced new rules that will change all that. From 2026, BPR (and Agricultural Property Relief (APR) for farmers) will be capped at £1 million for qualifying assets, after which the relief will be halved, reducing IHT liability by 50%. In practical terms, this means if a business or a share of a business (whether a partnership, limited company, or other structure) is valued over £1 million, the IHT on the excess will be charged at 20%.
For many businesses, this is a big shift. While there are some assets that currently qualify for BPR, especially in the more speculative areas like the AIM market or certain IHT-saving products, these changes are clearly aimed at reining in such strategies. It’s understandable why the government wants to limit these tax-saving vehicles, but unfortunately, small and medium sized businesses seem to be getting caught up in the net, and these new rules could cause serious headaches for family businesses.
Key Challenges
One of the first challenges businesses will face is how to value a business or a share of a business at the time of death. Until now, HMRC hasn’t been too focused on valuations when 100% BPR applies, but once the cap comes into play, valuing businesses will become much more complex. This will mean more work for accountants and advisors, and potentially a lot more back-and-forth with HMRC over valuations, which could drag out the process and create additional costs for businesses.
Another issue is how executors will come up with the cash to pay the IHT. Many businesses are valued based on a multiple of EBITDA, which can be high, especially in certain industries. But the reality is that many businesses don’t have enough cash in the bank to pay the IHT bill. Some might think the solution is for executors to sell the business or a part of it, but if it’s a family-owned business, would there be buyers for shares they don’t control? Would family members want to sell part of the business to an outsider? This highlights the importance of having a shareholders’ agreement in place, but the challenge remains that without the cash to cover IHT, the situation could become difficult.
Perhaps the most concerning issue is the impact these changes might have on business decisions. I already know of a couple of family-run businesses that are reconsidering their growth plans, hiring strategies, and investment decisions because of the potential IHT liabilities they could face. This is a disappointing outcome, especially since these businesses’ growth would have created new jobs and helped safeguard their future. Instead, the changes might actually stifle the growth that the government is trying to encourage.
Planning ahead
With these changes on the horizon, business owners and their advisors will need to work harder than ever to plan for IHT and explore ways to minimize its impact. Every situation is different, but here are some strategies to consider:
- Use the £1 million allowance: Each individual will be allowed £1 million of BPR relief under the new rules. One option could be to gift part of the business to a spouse to take advantage of both partners’ allowances, potentially saving £200,000 in IHT
- Gift assets sooner: Consider gifting parts of the business to other family members, with a plan to survive the seven-year rule (or at least three years to benefit from taper relief). This could lock in the value of the business for IHT purposes and prevent future growth from being taxed. Thankfully, gift relief rules haven’t changed, meaning gifts can still be made without triggering Capital Gains Tax, as long as they meet the conditions
- Think about trusts: Transferring business assets into a trust could also be worth exploring. Currently, transferring business interests into a trust doesn’t trigger tax charges, as long as BPR applies. However, with the new rules, this may change. Trusts could offer a more predictable IHT structure, with tax charged at regular intervals (every 10 years), rather than triggering a larger liability at each death. This could make it easier for businesses to manage cash flow
These are just a few options to consider, but the key takeaway is that business owners—particularly those running family businesses—should get advice early and start planning for these changes.
A final thought
One last point: it’s hoped that the government will reconsider the £1 million threshold. For many small and medium sized businesses, especially those that are growing or in certain sectors, this cap feels too low and could put significant strain on businesses that are vital to the economy. A higher threshold—perhaps £5 million or even £10 million—would be more in line with the government’s pro-growth agenda and would allow businesses to continue investing in their future without the looming worry of a large IHT bill.
Get in touch
If you have any questions about any of the topics covered in this article, get in touch with one of our experts here at Gravita.
