Get ready for the Inheritance Tax changes

Accountancy: Jamie Nice, Rickard Luckin

Farmers have taken to their tractors and descended on Westminster in protest against the proposed restrictions on Agricultural Property Relief (APR) and Business Property Relief (BPR). What may have been less obvious to readers is that these changes will impact far more than farmers.

BPR is also claimed by business owners to pass on trading assets, such as shares in a trading company or an interest in a partnership, either in their lifetime or via their will on death.

The current rate of BPR is 100%, meaning that shares in a family trading business pass to beneficiaries without Inheritance Tax (IHT). Additionally, assets gifted on death qualify for an uplift to market value for Capital Gains Tax (CGT) purposes, meaning beneficiaries pay no tax on the sale of an inherited business.

All change

From 6 April 2026, the 100% rate of BPR is restricted to the first £1m of value, with the excess subject to IHT at 20%. As a result of this change, the IHT due on the death of a successful entrepreneur owning a business worth £20m, will increase from £0 to £3.8m (ignoring spousal exemptions and assuming the nil rate band is used elsewhere). This creates a potential funding nightmare. Without significant liquid assets outside of the business, an IHT liability will place financial pressure on both the beneficiaries of the estate and the business.

While it’s possible to pay the IHT interest-free over 10 years, it is important to note that it is the beneficiary’s liability. If funded by distributions from the business, then this will be done out of taxed profits, and beneficiaries may also face tax on dividends at a rate of up to 39.35%.

It becomes easier to fund the liability if the business interest is sold either externally or to other non-related owners. The CGT uplift on death still applies, ensuring no additional tax in funding the IHT liability, but this isn’t helpful in family business situations where it is intended that the business remains in the family for future generations, meaning it now needs to be a key consideration in estate planning for business owners.

Time to re-consider succession planning?

For those who are keen for a business to remain in the family for future generations, it should still be possible to achieve this and there are a number of options to consider.

Shares can be gifted to your children, or put into a Trust for future generations, before 6 April 2026, while BPR is still at 100%. Although it is important to consider that the restricted relief will still apply if you die after this date but within seven years of the gift, and your children will also miss out on the CGT uplift that they would have received if inheriting the shares on your death.

Another option would be to calculate the potential IHT exposure and take out a whole of life assurance policy to protect against this.

Finally, the £1m BPR limit will not be transferrable between spouses. It is therefore necessary to consider whether shares are best owned jointly, and that wills are drafted correctly to ensure that married couples benefit from two £1m allowances.