Inheritance tax planning for business owners.

Inheritance tax applies to the value of an estate at death, plus certain lifetime transfers made in the seven years before it. Each person has a nil rate band of 325,000. Where a main residence passes to children or grandchildren, a residence nil rate band of up to 175,000 may be added, though it tapers away once the estate exceeds 2 million. Unused bands transfer between spouses and civil partners, which is why a married couple is often described as being able to pass around 1 million before any charge arises.

Above the available bands the rate is 40 per cent, reduced to 36 per cent where at least 10 per cent of the net estate is left to charity. Transfers between spouses and civil partners are generally exempt, but exemption is not the same as elimination: assets left to a surviving spouse simply arrive in the second estate, often larger than before.

The thresholds have been frozen for an extended period while property and business values have moved. That freeze, rather than any change in rates, is what draws ordinary estates and modest trading companies into charge for the first time.

For an owner managed company, business property relief is usually the single largest factor in the calculation. Qualifying unquoted shares in a trading company can attract 100 per cent relief, and certain assets used by the business can attract 50 per cent. Where it applies cleanly, a substantial company value can pass with no inheritance tax at all.

It is also the relief most often assumed rather than tested. The conditions that decide the outcome are specific:

• Trading, not investment. The business must be wholly or mainly trading. A company whose activities are substantially the holding of investments, letting property or dealing in securities falls outside the relief entirely, and the test looks at the business in the round rather than at one metric.
• Two years of ownership. The asset must generally have been held for at least two years before the transfer. Recent reorganisations, share issues and incorporations can restart that clock without anyone intending it.
• Excepted assets. Assets not used for the trade, including surplus cash held well beyond commercial need and investment property sitting on the balance sheet, are stripped out of the relieved value. Years of retained profit left undeployed can quietly convert a relieved business into a partly taxable one.
• Binding sale contracts. Where there is a binding contract for sale at the date of death, relief is generally lost. Shareholder agreements with automatic buy out clauses can create exactly that problem, whereas properly drafted cross option arrangements usually do not.

From April 2026 the 100 per cent rate is limited to a combined allowance of 1 million of qualifying business and agricultural property, with 50 per cent relief applying above that level. For owners of businesses worth materially more than 1 million, that change turns a relief that was effectively complete into a partial one, and makes the questions of ownership spread, timing and liquidity considerably more urgent than they were.

Most gifts to individuals are potentially exempt transfers. Survive seven years and the gift leaves the estate completely. Die within seven years and it is brought back into the calculation, with taper relief reducing the tax on gifts made more than three years before death. The taper reduces the tax, not the value, which is a distinction that regularly surprises families.

Alongside the seven year rule sit exemptions that are usable every year:

• An annual exemption of 3,000, which can be carried forward one year if unused.
• Small gifts of up to 250 per recipient per year.
• Wedding gifts within set limits depending on the relationship.
• Regular gifts out of surplus income, which are immediately exempt where they form a pattern and leave the donor's standard of living intact. For owners drawing dividends well in excess of their spending, this is often the most underused exemption available, and it depends almost entirely on keeping contemporaneous records of income and expenditure.

The rule that undoes most informal planning is the gift with reservation of benefit. Give away an asset but continue to enjoy it, the classic example being a house the donor still lives in rent free, and it remains in the estate however long they survive.

Where the aim is to pass on future growth while retaining control of how and when value is enjoyed, the structure matters more than the gift. A discretionary trust allows value to be settled for a class of beneficiaries with trustees deciding on distributions, at the cost of its own regime of entry, ten year and exit charges. A family investment company achieves something similar through share classes, with growth accruing to the next generation's shares while voting control stays where it is.

Within a trading company, a considered share structure can do much of the same work. Issuing growth shares to children before a period of expected appreciation transfers future value at a low present value, and can sit comfortably alongside business property relief where the company genuinely trades. What matters is that the commercial rationale is real and documented at the time, not reconstructed later.

None of these routes is neutral. Each carries its own income tax, capital gains tax and reporting consequences, and a structure chosen for inheritance tax alone frequently costs more elsewhere than it saves. The comparison should be run across every tax before anything is implemented.

Inheritance tax is generally payable within six months of the end of the month of death, and for many families the assets are the business and the home rather than cash. Instalment options exist for certain business and land interests, but they carry interest and they do not solve the underlying shortfall.

The usual answer is a whole of life policy written in trust, so that the proceeds fall outside the estate and reach the beneficiaries directly rather than adding to the taxable value. For a business with multiple shareholders, cross option agreements funded by life cover serve the same purpose while keeping the shares within the surviving owners and the value with the family. Neither reduces the tax. Both decide whether the business has to be sold to pay it.

The line is the same one that applies across tax. Using the nil rate bands, claiming reliefs the legislation provides, gifting early and structuring a company so that it genuinely trades are all uses of the rules for the purposes Parliament intended. Arrangements whose only real purpose is the tax result, particularly those that dress up retained benefit as a gift, fall on the other side and are challenged under long established anti avoidance rules.

What separates the two in practice is rarely the label. It is whether the facts support the position: who actually controls the asset, who actually benefits, what the board actually decided and when, and whether the paperwork existed at the time or was assembled afterwards.

For most owners the work runs in the same order. Value the estate properly, including the company, the home, pensions and any property held personally. Test business property relief against the balance sheet rather than assuming it. Clean up excepted assets and confirm the trading status holds. Use the annual exemptions and the surplus income exemption from now rather than later, since both are lost if unused. Then consider the structural questions, share classes, trusts and the timing of larger gifts, with the seven year clock in mind. Finally, cover the residual exposure with life assurance written in trust so the bill does not force a sale.

Review it whenever the business changes shape. A funding round, a property purchase, a period of strong retained profit or an approach from a buyer can each move the answer, and reliefs assessed three years ago may no longer describe the company that exists today.

Our guide to reducing corporation tax covers the reliefs that shape retained profit, which in turn shapes the excepted asset question above. The briefing on being tax efficient across personal and business affairs sets out the allowances and extraction decisions that determine how much wealth accumulates inside the estate in the first place. For owners with cross border interests, the international tax planning guide explains how residence and domicile interact with succession.

Succession work sits within our Tax Advisory practice, where planning, efficiency and consultancy are handled as one engagement rather than in isolation.