By Amal Shah
11 Aug 2026
Last updated: 05.08.2026
You have spent years building your family business. Naturally, you want it to pass safely to the next generation. Due to changes that came into force in April 2026 Inheritance Tax can get in the way if you do not plan ahead.
Inheritance Tax on a family business is one of the most misunderstood areas of estate planning. Many owners assume their company is fully protected. Others assume the whole thing will be taxed. The truth sits somewhere in between, and it depends on how your business is structured and what it does.
This guide explains how Inheritance Tax applies to family businesses, how a business is valued, and the main ways to pass it on.
Let’s start with the question everyone asks: are family businesses exempt from Inheritance Tax? The short answer is not automatically, but a valuable relief exists that can reduce the bill significantly.
Inheritance Tax is charged at 40% on the value of your estate above the tax-free threshold, known as the nil-rate band, which is £325,000 per person. There is an additional residence nil-rate band of £175,000 where a home passes to children or grandchildren. Your business counts as part of your estate, so without any relief it could face a significant charge.
This is where Business Relief comes in. Business Relief (formerly called Business Property Relief, or BPR) was introduced so that a genuine trading business could pass to the next generation without the family having to sell it just to pay the tax. For decades, qualifying businesses could be passed on with 100% relief and no upper limit.
That has changed. From 6 April 2026, 100% relief is capped. The first £2.5 million of combined qualifying business and agricultural assets can still pass with full relief. Anything above that receives 50% relief, which works out as an effective 20% Inheritance Tax charge on the excess.
So family businesses are not exempt from Inheritance Tax, but many still pass on tax-free. The relief is generous for smaller and medium-sized firms. It is the larger, more valuable businesses that now need to think carefully.
Business Relief only applies to businesses that are wholly or mainly trading. Companies that mainly hold investments, let property, or sit on large surplus cash reserves may not qualify in full, or at all. Shares quoted on markets treated as ‘not listed’, such as AIM, now get only 50% relief with no allowance.
Paul Attridge, Tax Partner: “The families who get caught out are usually the ones who assumed their business qualified in full. A business evolves over time. It picks up an investment property here, a pot of surplus cash there. Each is sensible on its own, but together they can quietly erode the relief. The signs you have outgrown a standard adviser setup are simple: your affairs no longer fit on one page, your wealth sits across several structures, and no single person has the full picture.”
To work out the tax, the business first has to be valued. This is done using the market value at the date of death, or the date of a lifetime gift.
The starting point is usually the balance sheet. The executor reviews the assets and liabilities and checks that everything is shown at open market value. Property is often referred to the Valuation Office Agency for a separate view.
Certain items get extra attention. Surplus cash, investment property, and other non-trading assets may fall outside Business Relief even if the rest of the business qualifies. That means your effective relief threshold can be lower than £2.5 million if part of your estate is already out of scope.
The value is reported to HMRC on form IHT400, with a separate schedule (IHT413) for business and partnership interests. Since the 2026 changes, this process is more document-heavy, with detailed valuations and tighter timescales. Good records kept during your lifetime make it far smoother later.
There is no single right answer. The best route depends on the value of your business, your age and health, how much control you want to keep, and your wider family plans. Here are the main options.
The simplest route. Business Relief still applies, so up to £2.5 million can pass free of tax, and any excess is taxed at an effective 20%. Married couples and civil partners can combine their allowances, protecting up to £5 million between them.
A gift of shares can fall out of your estate entirely if you survive seven years (a potentially exempt transfer). The trade-off is that you give up ownership and control, and there is uncertainty if you do not survive the seven years. Watch the anti-forestalling rule too: gifts of qualifying assets made on or after 30 October 2024 can still count towards the recipient’s allowance if you die on or after 6 April 2026.
Trusts can help you pass value down while keeping some control. Each trust has its own £2.5 million allowance for 100% relief, refreshing every ten years, though new anti-fragmentation rules stop multiple trusts being used to multiply allowances.
This approach ‘freezes’ the value of your existing shares and creates a new class that captures future growth. The growth then builds up in the hands of the next generation, outside your estate. It lets you keep control and income while capping your exposure.
A private company designed to hold and grow family wealth, often used as an alternative to a trust. It can pass growth to the next generation while the founder retains control through the share structure.
Whichever route you choose, remember the tax can be paid in instalments. Inheritance Tax on qualifying business property can be spread over ten annual, interest-free payments, provided the business is not sold.
Passing on the business is only part of the picture. A few other points deserve attention.
If a bill does arise, your family needs to fund it without starving the business of working capital. Life insurance written in trust is a common and clean way to cover the liability.
Your will, your articles of association, and any shareholders’ or partnership agreement all need to point in the same direction. Conflicts between them can undo careful tax planning.
Make sure each spouse’s £2.5 million allowance is used, and check that holding periods and the trading test are met well before any transfer.
HMRC is scrutinising the ‘wholly or mainly trading’ test more closely than before. A business that qualified five years ago may not qualify today. A periodic health-check keeps you ahead of any drift.
David Horowitz, Partner, Head of Gerald Edelman Wealth: “A family office is not for everyone, and it would be wrong to suggest otherwise. If your wealth is straightforward, held in one or two places, and well served by your existing advisers, a full family office is unnecessary and simply adds cost. It earns its place when the family becomes multi-generational, the assets span several structures and jurisdictions, and coordination – tax, investments, governance, succession – becomes a job in its own right.”
Inheritance Tax on a family business is no longer as straightforward as it once was. A genuine trading business can still benefit from valuable relief, but early planning is now more important than ever.
At Gerald Edelman, Our Tax team helps families look at the full picture, from Business Relief and valuations to succession planning, gifting, trusts and family investment companies. Our Wealth Management team can also help plan for any future liability.
If you would like to understand how Inheritance Tax could affect your family business, please get in touch with our team.
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