Passing on the Family Business: Navigating the changes to Inheritance Tax

While 100% BPR has been available, business owners have been able to pass on their interest in the business free from inheritance tax (IHT) on their death. However, changes to the rules due to take effect on 6 April 2026 mean that companies with shareholdings concentrated in the hands of one or a small number of shareholders may face significant challenges on the death of a shareholder. Both the company and its shareholders should therefore plan ahead. 

What is changing?

From 6 April 2026, 100% BPR for qualifying business and agricultural assets will be capped at £2.5 million per individual (rather than the £1 million cap originally proposed). Any value above this cap will attract relief at only 50%, resulting in an effective inheritance tax charge of 20% on the excess. The cap will be transferable between spouses or civil partners, meaning that a couple may be able to pass on up to £5 million of qualifying business assets with full relief. 

For higher value businesses, however, the introduction of the cap may pose an existential threat. Although the IHT attributable to qualifying business assets can be paid in up to ten annual, interest-free instalments, this does not remove the fundamental issue of how the IHT liability will be funded. As a result, many family business owners are considering or have already begun passing on shares by way of lifetime gifts in an effort to reduce the IHT exposure (with the relief allowance effectively refreshing where the donor survives the lifetime gift by seven years).

The BPR cap is explained in more detail in our brochure. 

Potential Problems from 6 April 2026

• Funding the IHT bill may be challenging where there is insufficient liquidity within the deceased’s estate.
• The business might be pressured to pay out dividends it would not normally make, just to help pay the tax.
• Minority shareholders may be entitled to join in such dividends, complicating matters further.
• Generating liquidity from the business will come at a cost, meaning that the effective tax burden on assets in excess of the cap can approach 40% rather than the 20% headline rate.
• Some assets—like certain property or excess cash—are excluded from BPR, which can make the tax burden even heavier.
• Fragmentation of ownership through lifetime gifting, while aimed at reducing IHT exposure, can carry risks for business continuity if not carefully planned and managed.

Effective planning 

Taking expert advice is essential to ensure that all the relevant circumstances are factored into any IHT planning. The first step will usually be to review the eligibility of the business for BPR to understand the impact of the rule changes. If required, restructuring may be possible to maximise the likelihood of the availability of BPR and extent of any excepted assets. 

Once there has been an appraisal of the value of the business assets and the wider estate, the options to mitigate IHT exposure can be considered. Lifetime gifts, trust structures, growth shares, insurance policies and effective will planning should be considered alongside the overall plan for meeting the business owner’s long-term financial needs and business succession plans. 

Any strategy to reduce IHT will require decisions from the business owner about what their priorities are. Options such as the gifting of shares, could involve the loss of some control of the business. It is possible to mitigate some of the effects of this using different share classes with varying rights attached to the shares. It will be important to consider the full picture when deciding which action to take. 

Call to Action

Changes to BPR and IHT mean that owner managed businesses need to plan carefully. The window of opportunity for taking certain action before the changes come into force on 6 April 2026 is closing. There is, however, much that can be done by business owners and the business itself by way of long-term strategy for addressing the challenges posed by the new cap on reliefs. Business owners should review their existing wills, their succession and IHT planning to understand the potential impact and available options. In the meantime, businesses should assess the potential impact of the death of an owner and consider what steps can be taken now to protect business continuity.  

Our experts are able to assist with all aspects of inheritance tax planning and corporate structuring. Please contact Dan Bastide in our Corporate Team if you would like to discuss this further.