Setting up multiple companies to separate business interests can seem very straight forward. There are however important considerations. We explore the implications of owning too many companies.
New Inheritance Tax Rules Could Hit Business Owners Hard – Are You Prepared?
20 March 2025
Accounting & Compliance, Building a Business, Estate Planning / IHT, Selling a Business, Structuring a Business
There has been significant media attention on the proposed inheritance tax (IHT) changes to agricultural property relief, with protests from farmers since the announcement in October 2024.
However, less attention has been given to how business owners will be affected by IHT changes, potentially with even greater financial consequences.
Background: Business Relief and Inheritance Tax
Since 1976, business assets have been exempt from inheritance tax under Business Property Relief (BPR), now known as Business Relief (BR).
This allowed businesses to be passed down without the need to sell assets to pay IHT.
The relief has remained largely unchanged since 1996, providing 100% exemption on most business assets, including unquoted company shares and goodwill in sole trade or partnership businesses.
For many years, this meant that business owners did not have to plan heavily for IHT—until now.
What’s Changing
From 6 April 2026, the rules will shift dramatically:
- Business relief will only apply to the first £1 million of combined business and agricultural assets in an estate.
- This relief cannot be transferred between spouses.
- Any business property above £1 million will be taxed at 20%.
Example
Take an example of an estate worth £4 million, with:
- £1 million is the family home and savings
- £3 million is the value of the shares in the family trading company
For this purpose Mum died first leaving all her assets to Dad.
Dad is still working in the business and owning all the shares when he dies.
The current IHT liability is:
From 6 April 2026 the IHT liability will be:
You will see that there is an extra £400,000 to be paid out of Dad’s estate.
£400,000 of the total tax can be paid in ten annual instalments, but it still a lot of money to find and could necessitate selling some of the business or the family home or the need for expensive financing arrangements.
Alternatively if there are sufficient funds in the business the new owners could take these to pay the tax, but that would result in more tax in the form of PAYE and NI or dividend tax, depending on how the monies are extracted.
What planning can you do now?
With only months left before the new rules take effect, now is the time to start planning and making necessary changes.
The first thing to note is that there is ‘anti-forestalling’ legislation with the new rules to prevent people from making lifetime gifts before the new rules come into play.
That means any gifts of business or agricultural assets made between Budget Day (30 October 2024) and 5 April 2026 will be subject to the new legislation if the donor dies after 5 April 2026 but within 7 years of the gift.
Potential considerations may include:
Lifetime Gifts
- Consider gifting business assets at least seven years before death to maximise tax benefits.
- Obtain a business valuation to assess your future tax position.
- Spreading ownership across multiple family members may be beneficial.
- Watch out for capital gains tax (CGT) on gifts, except when transferring assets to a spouse.
- BR refreshes every seven years, so gifting can be repeated over time.
Will Planning
- Business relief is not transferable, so spouses should each own business property to maximise allowances.
- Ensure at least £1 million is passed to the next generation on the first death to avoid losing relief.
- If company shares are involved, consider adjusting salary structures to support a surviving spouse.
Use of Trusts
- Trusts have their own £1 million relief, allowing tax-efficient transfers.
- After 30 October 2024, a settlor can only claim £1 million across multiple trusts.
- Married couples can each set up a trust, protecting £2 million.
- BR refreshes every 10 years for trusts, providing long-term tax advantages.
- As trust taxation is complex, seek professional advice before proceeding.
Summary
We recommend businesses owners take the following steps:
- Get your business valued now to assess how much the new rules will affect you
- Consider transferring business assets to your spouse
- Consider making lifetime gifts of business assets to the next generation every seven years
- Consider changing your Will so that business assets are passed to the next generation on the first death
- Consider putting £1 million of assets into a trust
- Review your Wills and consider changes to ensure business relief is maximised for married couples
Getting in touch
If you would like help with business valuations, inheritance tax planning or trust tax feel free to give us a call on 01634 731390 or email Jan Friend.
Our team can help you develop a tailored strategy to protect your business and minimise future tax liabilities.
Our services
If you would like to find out more about some of our services that might help you please take a look at our related pages:
Blogs related to IHT Planning
Take a look at our other blogs on the topic of IHT Planning for Business Owners
The Haunting Consequences of Dying Without a Will for Your Business
What is a trust? The pros and cons of setting up a trust
The content in this blog is correct as at 19th March 2025. See terms and conditions.
