The new Inheritance Tax rules for business owners

The Autumn 2024 Budget gave business owners plenty to worry about, higher employer NICs, tighter business rates relief and frozen thresholds, to name a few. Among them was the biggest change to business succession planning in a generation, yet most owners barely noticed. The new rules came into force this April and if your business is worth more than £2.5 million, your family is now exposed, whether the business has been sold or not.

Until April, you could pass your shares to your children entirely free of Inheritance Tax (IHT). Generations of owners built their succession plans on it.

That plan no longer works for owners of higher value businesses.

What changed

Before April 2026, Business Property Relief (BPR) allowed qualifying business assets to be passed on entirely free of IHT, with no upper limit. From April 2026, that has changed. BPR is now capped at £2.5 million per individual. Above that threshold, only 50% relief applies, meaning the excess is effectively taxed at 20%. The reforms also reduce relief on shares quoted on markets treated as ‘not listed’ (including AIM), where BPR will be limited to 50% with no £2.5 million allowance, regardless of holding size.

That £2.5 million assumes the business qualifies in full. BPR only applies to qualifying trading assets – investment businesses, holding companies with substantial non-trading assets and surplus cash reserves may not qualify in full, so your effective threshold may be lower.

What that means in practice

Here’s what that looks like. You own 100% of a business worth £10 million. In your will, you leave all of your shares to your daughter. Under the new BPR rules, only the first £2.5 million passes to her free of IHT. The remaining £7.5 million is taxed at an effective 20%, leaving a £1.5 million bill payable to HMRC in cash.

That £1.5 million has to come from somewhere. HMRC allows it to be paid in interest-free instalments over 10 years but only while the business remains unsold; on a sale, the balance falls due immediately.

Spreading payments still leaves the question of where the cash comes from. The obvious source is the business itself, but drawing on company reserves can place undue strain on working capital, putting the business under financial pressure at exactly the point when the family has other things to manage.

If your daughter can’t find the cash within the estate, she pays it herself. What was meant to be an inheritance becomes a personal debt.

The limits of standard planning

There are some planning options that can help reduce the IHT bill.

One option is the spousal transfer. Any unused part of a spouse’s or civil partner’s £2.5 million allowance passes to the survivor on first death, lifting the relief available on the second death up to £5 million. This helps for many couples but does little for businesses worth materially more than that.

Lifetime gifts are another viable option. Transferring shares to your children during your lifetime can avoid IHT entirely, provided you survive seven years after making the gift (a Potentially Exempt Transfer, or PET). If you don’t, the gift is reassessed at the date of death, with BPR tested from the donee’s perspective. It works but requires giving up control of your shares and carries real uncertainty around the seven-year rule. There is also an anti‑forestalling rule to be aware of. Gifts of qualifying business assets made on or after 30 October 2024 will count towards the recipient’s £2.5 million BPR allowance if the donor dies on or after 6 April 2026, even though the gift was made before the new regime took effect.

Both are legitimate tax-saving mechanisms. Neither, alone or combined, reliably resolves the position for owners well above the cap.

Why a sale may be worth considering

For many business owners, a full or partial sale deserves a closer look.

A sale gives you something that holding until death does not: control over timing, structure, and crucially, liquidity. If a significant IHT liability is coming, having cash to meet it is far better than your family scrambling for it at short notice.

A partial sale can be a middle path. Selling a proportion of your shares releases cash while keeping you involved in the business, and the proceeds give you the means to meet a future IHT bill or fund wider estate planning, including lifetime gifts, trusts, or life cover that can reduce it.

The right answer will depend on your specific circumstances, the value of your business, and your personal objectives. But for owners whose estates are materially above the £2.5 million threshold, the case for exploring a sale has never been stronger.

Next steps

If the value of your business is above the £2.5 million threshold and you haven’t revisited your position since the Budget, it is worth doing so now.

Understanding the value of your business is the first step: not just what it is worth today, but what a buyer would pay for it, and on what terms. An early conversation with an experienced adviser can help bring the options into focus and ensure you are not caught out if circumstances change. That runway lets you strengthen the business, develop your team, resolve any structural issues and, if you do go to market, do so from a position of strength rather than necessity.

For a broader view of how the various succession routes fit together, see our recent piece written for the British Business Excellence Awards: Family Business Succession Planning: A Practical Guide for UK Business Owners.

If you would like to understand how the new BPR rules affect you, or to explore what a sale process might look like for your business, please get in touch with our Deal Advisory or Tax team at hello@geraldedelman.com.