Inheritance Tax Changes

Stephen Maggs assesses the impact on businesses of recent inheritance tax changes.

Much has been made in the popular press of the £1m cap per individual to be introduced on inheritance tax Agricultural Property Relief claims, meaning many business owners could be forgiven for thinking that non-agricultural businesses are unaffected. Which isn’t the case at all! The £1m cap also applies to inheritance tax Business Property Relief (BPR) – which relates to unquoted trading businesses.

These changes are significant for trading businesses and the cap set to be introduced on 6 April 2026 requires consideration at an
early stage.

BPR is currently unlimited, meaning that a share/interest in an unquoted trading business is not subject to inheritance tax once the share/interest has been owned for two years. From 6 April 2026, this will be capped at £1m. The excess of the value of such an interest/share above £1m will be subject to inheritance tax at 20% – resulting in inheritance tax liabilities that would not currently arise.

A broad overview of the impacts and considerations for unquoted trading businesses is:
All business owners, whether impacted or not by these changes, should regularly review their succession or exit strategy – it is key to avoid the “bury my head in the sand” strategy. If the next generation is not involved in, or not capable of running the business, etc, – such positions need to be acknowledged and planned for. Whether the desire is to sell the business in the short-term, grow the business to sell, or for the business owner to take a step back but keep the business earning for the family, is there an adequate management team in place to facilitate this? If not, a recruitment policy needs to be considered, potentially with a remuneration structure for key personnel to drive the objective.

Many business owners may now have an inheritance tax liability under the new rules – such business owners should seek advice from an experienced tax advisor (CTA member) to calculate their exposure to inheritance tax, factoring in the change. This is particularly important for elderly business owners, or those in ill health.

Business owners should then seek advice on mitigation planning opportunities to attempt to mitigate any increased inheritance tax liability that results from the proposed changes. One option may be lifetime gifts of shares/interests – however, practical advice needs to be obtained here around such issues as: how would direct transfers to individuals impact the running of the business? Is future divorce (which will require family legal advice) or bankruptcy proceedings that the next generation may be party to a concern? Is losing control (voting rights, etc) a concern if gifts are made? Planning using trusts as opposed to direct gifts may be prudent to consider if any, or all, of these are a concern. The structure of the business may be important.

Where mitigation planning isn’t desirable at the moment, businesses and their owners should consider taking life insurance to cover business owners’ inheritance tax liability on their death. This is to provide funds so that the liability can be funded.

From a funds perspective, businesses may need to consider factoring such liabilities in their cash reserve planning and projection. This may impact cash extraction decisions. The corporate legal governance documentation (namely Articles of Association, shareholders’ agreements, partnership agreements etc) of the business should be considered by an experienced tax advisor working in conjunction with an experienced corporate lawyer – ensuring there are clear mechanisms for shares in an unquoted trading company to be purchased by the company (a share buy-back/purchase of own shares) and/or other shareholders and for what price. Fundamentally, this documentation is consistent with the will of the business owner – therefore this is an opportune time to seek corporate legal advice to review and refresh the business governance documentation, and the business owners’ wills.

Business succession has long been considered too late or not at all due to the safety net of the inheritance tax reliefs that are the subject of these reforms. From 6 April 2026, this changes. Much of what business owners do now will be fundamental to what the business looks like in the future, what value is left to the next generation, and the legacy of the business.

RRL
Truro: 01872 276116
Penzance: 01736 339322
post@rrlcornwall.co.uk
www.rrlcornwall.co.uk

Words by Stephen Maggs, Tax Partner at RRL