How can business owners reduce inheritance tax?

Business owners can reduce IHT through Business Property Relief (up to 100% on qualifying assets), lifetime gifting of business assets (immediately exempt if BPR applies), succession planning, and trust structures. The right approach depends on the business and family circumstances. Business owners have several IHT planning strategies: (1) Business Property Relief (BPR) — qualifying business assets (shares in unlisted trading companies, sole trader businesses) can receive 100% or 50% relief from IHT. This is the most powerful IHT relief for business owners. (2) Lifetime gifting — gifts of BPR-qualifying business assets are immediately exempt from IHT (no 7-year waiting period), because BPR applies to the gift. (3) Holdover relief — gifts of business assets can also benefit from CGT holdover relief, deferring the capital gains tax to the recipient. (4) Succession planning — planning the transfer of the business to the next generation, considering IHT, CGT, and commercial objectives. (5) Trust structures — using trusts to hold business assets, providing asset protection and control. (6) Spousal planning — splitting business assets between spouses to maximise BPR and the nil-rate band. The right strategy depends on the type of business, the value, the family circumstances, and the owner's age and health. Specialist advice is essential. Relevant legislation: Inheritance Tax Act 1984, Sections 104-113 (BPR); TCGA 1992, Section 165 (holdover relief). Example: A business owner has qualifying trading shares worth £2 million. If they retain the shares until death, BPR applies (currently 100%, but from April 2026, 100% up to £1 million and 50% above). If they gift the shares to their children during their lifetime, BPR applies to the gift (immediately exempt from IHT), and holdover relief defers the CGT. The children inherit the original cost base, and the business is outside the owner's estate. Common mistake: Assuming that BPR will automatically protect the business from IHT. BPR only applies to qualifying trading businesses, and from April 2026, the £2.5 million cap means proactive planning is needed for larger businesses.

Can I gift my business to my children without paying tax?

If the business qualifies for Business Property Relief, a lifetime gift of the business is immediately exempt from IHT (no 7-year rule). CGT holdover relief can also defer the capital gains tax. This is one of the most tax-efficient ways to transfer a business. Lifetime gifts of BPR-qualifying business assets are immediately exempt from IHT, without the need to survive 7 years. This is because BPR applies not only on death but also to lifetime gifts. The combination of BPR (for IHT) and holdover relief (for CGT) makes lifetime gifting of business assets highly tax-efficient: (1) IHT — the gift is immediately exempt from IHT (BPR applies). (2) CGT — holdover relief under Section 165 TCGA 1992 defers the capital gains tax. The gain is 'held over' and added to the recipient's cost base when they eventually sell. (3) No 7-year rule — unlike gifts of non-business assets, there is no 7-year waiting period for IHT exemption. However, the BPR conditions must be met at the time of the gift: the business must be a qualifying trading business, and the assets must have been owned for at least 2 years (for shares, the company must have been a qualifying trading company throughout). From April 2026, the £2.5 million cap will apply to lifetime gifts as well as transfers on death. Relevant legislation: Inheritance Tax Act 1984, Sections 104-113 (BPR); TCGA 1992, Section 165 (holdover relief for business assets). Example: A business owner gifts qualifying trading shares worth £1.5 million to their children. BPR applies (100% under current rules), so the gift is immediately exempt from IHT. Holdover relief defers the CGT — the children inherit the original cost base (e.g., £100,000) instead of the market value (£1.5 million). If the children later sell the shares for £2 million, the CGT is calculated on £1.9 million (£2 million - £100,000). Common mistake: Not checking that BPR applies before making the gift. If the business does not qualify for BPR (e.g., it is an investment business), the gift is a potentially exempt transfer subject to the 7-year rule.

What is succession planning for IHT?

Succession planning is the process of planning for the transfer of the business to the next generation or a buyer, considering IHT, CGT, and commercial objectives. It is essential for business owners who want to protect their business and family wealth. Succession planning involves planning how the business will be transferred when the owner retires, dies, or sells. Effective succession planning considers: (1) IHT — using BPR, lifetime gifting, and trust structures to minimise IHT. (2) CGT — using holdover relief, entrepreneurs' relief (Business Asset Disposal Relief), and other reliefs to minimise CGT. (3) Commercial objectives — ensuring the business can continue to operate successfully after the transfer. (4) Family dynamics — managing the expectations and interests of family members, some of whom may be involved in the business and others not. (5) Timing — planning the transfer over several years to maximise tax efficiency and ensure a smooth transition. Succession planning should start early — ideally 5-10 years before the planned transfer — to allow time to implement the strategy and take advantage of tax reliefs. Specialist advice from a tax adviser, lawyer, and financial planner is essential. Relevant legislation: Inheritance Tax Act 1984 (BPR); TCGA 1992 (holdover relief, BADR); company law provisions. Example: A business owner plans to retire in 7 years. They start succession planning now: gifting shares to children (using BPR and holdover relief), restructuring the business to ensure it qualifies for BPR, training the next generation of management, and setting up a trust to hold a portion of the shares for asset protection. By the time they retire, the transfer is structured efficiently for both IHT and CGT. Common mistake: Leaving succession planning too late. Rushed transfers may not qualify for BPR (the 2-year ownership period may not be met) and may trigger unnecessary tax charges.

How will the April 2026 BPR changes affect business owners?

From 6 April 2026, 100% BPR is capped at £2.5 million combined with APR. Above £2.5 million, relief is reduced to 50% (effective 20% IHT rate). Business owners with qualifying assets above £2.5 million should review their estate planning urgently. The April 2026 BPR changes will significantly affect business owners with qualifying assets above £2.5 million. Key impacts: (1) The first £2.5 million of combined BPR/APR qualifying assets receives 100% relief (no IHT). (2) Qualifying assets above £2.5 million receive 50% relief (effective 20% IHT rate). (3) The cap applies per individual, so a married couple could potentially have a combined cap of £5 million if assets are split appropriately. (4) The cap applies to both transfers on death and lifetime gifts. (5) Transitional provisions may apply for assets held before 30 October 2024. Planning strategies before April 2026 include: (a) Splitting business assets between spouses to use both £1 million caps. (b) Making lifetime gifts of business assets (using BPR to avoid the 7-year rule). (c) Restructuring the business to separate qualifying and non-qualifying assets. (d) Reviewing the overall estate plan. Early advice is essential, as some strategies require time to implement. Relevant legislation: Finance Bill 2025-26 (BPR/APR cap); IHTA 1984 Sections 104-113 (as amended). Example: A business owner has qualifying trading shares worth £3 million. Before April 2026, 100% BPR applied (no IHT). Under the April 2026 rules (now in effect): £2.5 million at 100% relief (no IHT), £0.5 million at 50% relief (effective 20% IHT = £100,000). By gifting £500,000 of shares to their spouse, each spouse's holding is £1.5 million (below the £2.5 million cap). Each spouse's IHT: £0 (100% BPR within cap). Total IHT: £0 instead of £100,000. Common mistake: Assuming that the £2.5 million cap only affects very large businesses. A business worth £3 million would face £100,000 of IHT under the new rules, where previously no IHT was due.

What is holdover relief and how does it interact with BPR?

Holdover relief (Section 165 TCGA 1992) defers capital gains tax on gifts of business assets. Combined with BPR (which provides IHT relief), it allows business assets to be gifted during lifetime with no IHT and no immediate CGT. Holdover relief and BPR are complementary reliefs that make lifetime gifting of business assets highly tax-efficient: (1) IHT — BPR applies to the gift, providing immediate exemption from IHT (no 7-year rule for qualifying business assets). (2) CGT — holdover relief defers the capital gains tax. The gain on the gift (market value minus original cost) is 'held over' and added to the recipient's cost base. When the recipient eventually sells the asset, the held-over gain is included in the CGT calculation. The combination means: (a) The donor pays no IHT on the gift (BPR). (b) The donor pays no immediate CGT on the gift (holdover relief). (c) The recipient inherits the original cost base (plus the held-over gain). (d) The asset is outside the donor's estate for IHT purposes. However, holdover relief is only available for 'business assets' as defined in Section 165 TCGA 1992, which generally includes shares in unlisted trading companies and assets used in a trade. The definitions are similar but not identical to the BPR definitions, so specialist advice is needed. Relevant legislation: TCGA 1992, Section 165 (holdover relief for gifts of business assets); Inheritance Tax Act 1984, Sections 104-113 (BPR). Example: A business owner bought shares in a qualifying trading company for £200,000. They are now worth £1.5 million. The owner gifts the shares to their children. BPR applies (no IHT). Holdover relief applies (no immediate CGT). The held-over gain is £1.3 million (£1.5 million - £200,000). The children's cost base is £200,000 + £1.3 million held-over gain = £1.5 million. If the children sell the shares for £2 million, the CGT is calculated on £500,000 (£2 million - £1.5 million). Common mistake: Forgetting to claim holdover relief on the CGT return. The relief must be actively claimed by both the donor and the recipient on their respective tax returns.

Should I use an Employee Ownership Trust (EOT) for IHT planning?

An Employee Ownership Trust (EOT) can be an effective succession and IHT planning tool for business owners. Selling to an EOT can provide CGT relief and remove the business from the estate, but the structure is complex and requires specialist advice. An Employee Ownership Trust (EOT) is a trust that holds shares in a company on behalf of its employees. Selling shares to an EOT can provide significant tax advantages: (1) CGT — if the EOT acquires a controlling interest in the company, the seller may qualify for CGT relief (0% CGT on the sale, compared to 10% with BADR or 24% standard rate). (2) IHT — shares held by an EOT are outside the seller's estate, as the seller no longer owns them. (3) Employee benefits — employees can receive tax-free bonuses from the EOT. The EOT is particularly suitable for business owners who want to reward employees, preserve the business as a going concern, and achieve a tax-efficient exit. However, the EOT structure is complex: the trust must be set up correctly, the sale must be at market value, and ongoing compliance is required. Specialist advice from a tax adviser, lawyer, and corporate financier is essential. Relevant legislation: TCGA 1992, Section 236L (EOT CGT relief); Inheritance Tax Act 1984 (trust provisions); trust law. Example: A business owner sells 100% of their company shares to an EOT for £5 million. The CGT on the sale is £0 (EOT relief). The shares are outside the owner's estate for IHT purposes (they no longer own them). The owner receives £5 million in cash, which can be gifted to family or invested. The employees benefit from tax-free bonuses from the EOT. Common mistake: Assuming that an EOT is suitable for all businesses. The EOT is best suited to profitable, established companies with a strong management team. It is not suitable for businesses that depend heavily on the owner's personal relationships or skills.

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For business owners, inheritance tax planning is not just about the family home — it involves the value of the business itself. Business Property Relief can provide significant IHT savings, but the rules are complex and the April 2026 changes will affect many business owners. Effective IHT planning for business owners involves understanding BPR, succession planning, and the interaction between IHT and other taxes (such as capital gains tax and entrepreneurs' relief).

The IHT Challenge for Business Owners

Business owners often have significant wealth tied up in their business. Without proper planning, IHT can force the sale of the business to pay the tax bill, destroying a lifetime's work. Business Property Relief (BPR) can mitigate this risk by providing up to 100% relief on qualifying business assets. However, BPR has strict conditions and the April 2026 changes will cap 100% relief at £2.5 million. Business owners should plan early to ensure their business can be passed on efficiently.

Succession Planning

Succession planning is the process of planning for the transfer of the business to the next generation or a buyer. Effective succession planning considers IHT, capital gains tax (CGT), and the commercial aspects of the transfer. Strategies include: lifetime gifts of business assets (with BPR and holdover relief), establishing employee ownership trusts, and structuring the business for sale. The right approach depends on whether the business will be passed to family, sold to a third party, or transferred to employees.

Lifetime Gifts of Business Assets

Lifetime gifts of business assets can be highly tax-efficient. If the assets qualify for BPR, the gift is immediately exempt from IHT (no 7-year waiting period). Additionally, holdover relief under Section 165 TCGA 1992 can defer the capital gains tax on the gift. This combination means that a qualifying business can be passed to the next generation during the owner's lifetime with no IHT and no immediate CGT. However, the recipient inherits the original cost base for CGT purposes, which may result in a larger CGT bill when they eventually sell.

The April 2026 Changes

From 6 April 2026, the £2.5 million cap on 100% BPR will significantly affect business owners with qualifying assets above £1 million. Planning is strongly recommended. Strategies may include: splitting business assets between spouses, making lifetime gifts (using BPR to avoid the 7-year rule), restructuring the business, and reviewing the overall estate plan. Early advice is essential, as some strategies require time to implement.

Key Points

What You Need to Know

BPR can provide up to 100% relief from IHT on qualifying business assets
Lifetime gifts of BPR-qualifying assets are immediately exempt from IHT
Holdover relief can defer CGT on gifts of business assets
The April 2026 £2.5 million cap will affect business owners with substantial assets
Succession planning should consider IHT, CGT, and commercial objectives

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Nil-Rate Band & Residence Nil-Rate Band Business Property Relief (BPR)April 2026 IHT Changes Agricultural Property Relief (APR)Lifetime Gifting & the 7-Year Rule Trusts & Inheritance Tax IHT for Married Couples IHT on Property & Estates IHT for Business Owners IHT Exemptions & Reliefs IHT on Foreign Assets IHT Planning Strategies IHT Rate & Calculation

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