Business Relief under the new rules

Planning for business owners

Introduction: The essence of Business Relief

Inheritance Tax (IHT) has long been a complex issue in the UK, often requiring families to consider difficult decisions about inherited wealth and family businesses.

A significant IHT liability arising on death can create pressure on liquidity, potentially requiring the sale of business assets to meet the tax charge and disrupting the continuity of the business in the process. Business Relief (BR), initially known as Business Property Relief, was introduced in the Finance Act 1976 precisely to alleviate this burden, ensuring that valuable trading businesses could be passed down through generations without being unduly impacted by IHT. This relief remains a cornerstone of succession planning for private businesses, encouraging continued investment and growth.

While BR has evolved, its core principle endures: to reduce or eliminate IHT on certain business assets, provided specific conditions are met, historically offering up to 100% relief.

However, significant changes come into effect from 6 April 2026, profoundly impacting how family businesses with substantial qualifying assets plan for their future. This article sets out these changes, their implications for family businesses with over £2.5 million in qualifying assets, and the financial planning solutions to navigate this new landscape.

The current landscape of Business Relief rules

BR currently provides a reduction in the value of gifts of ‘Relevant Business Property’ (RBP) for IHT purposes, whether made during a lifetime or on death. Relief is typically granted at either 100% or 50%, depending on the asset type and ownership.

What qualifies for Business Relief?

To qualify, assets must generally have been owned for at least two years immediately before the transfer (or death) and be held at that time. The company must primarily be a trading business, not one predominantly engaged in investment activities. Common qualifying assets include:

Shares in an unlisted trading company

This includes shares in a limited company engaged in trading whose shares are not listed on a main stock exchange. Shares in an AIM-listed company are considered ‘unlisted’ for tax purposes and can also qualify if the company is a trading company.

An interest in a trading business

Direct ownership or partnership in an unincorporated business (sole trader or partnership).

Land, buildings, or machinery

These can qualify if used wholly or mainly for a business carried on by a company or partnership, or by the transferor as a sole trader.

Rates of Relief

100% Relief: Typically available for shares in an unlisted company (including AIM shares) and an interest in a trading business (sole trader or partnership).
50% Relief: Typically applies to shares in a company listed on a recognised stock exchange (excluding AIM) where the individual controls more than 50% of the voting rights and land, buildings, or machinery personally owned by the transferor and used in a controlled business (but not owned by the business itself).

The ‘Excepted Assets’ rule:

This rule prevents BR on assets not genuinely used for business purposes. An asset is ‘excepted’ if not used wholly or mainly for business purposes in the two years preceding the transfer, or if not required for future business use. Cash reserves, for example, can be excepted assets if they exceed normal working capital requirements. This is a common pitfall for family businesses holding significant surplus cash.

Interaction with Agricultural Property Relief (APR):

APR provides relief from IHT on qualifying agricultural property. While APR applies to the agricultural value, BR can apply to non-agricultural business elements of a farming business (e.g., a farm shop). Where both qualify, both reliefs can be claimed. The upcoming changes will also impact the combined allowance for both BR and APR.

Key benefits of current BR:

The current BR regime offers faster IHT relief compared to other transfers, requiring just two years of ownership. It allows owners to retain full control over their business assets and helps prevent forced sales to meet IHT liabilities, preserving business continuity. These significant advantages have made BR a cornerstone of estate planning.

The new rules: April 2026

Following the government's announcement at the Autumn Budget 2024 and the subsequent increase to the relief threshold announced on 23 December 2025, the reforms to Business Relief (and Agricultural Property Relief) took effect from 6 April 2026 under the Finance Act 2026.

The £2.5 million cap

The most impactful change is the introduction of a £2.5 million cap on 100% Business Relief. This cap was originally set at just £1 million, but successful lobbying led to an announcement on 23 December 2025 that this would be increased to £2.5 million.

From April 2026, the first £2.5 million of combined agricultural and business property will continue to receive 100% relief.
For any qualifying assets exceeding this threshold, the relief will be reduced to 50%. This means a 20% IHT charge (50% relief on a 40% IHT rate) will apply to values above £2.5 million.
The allowance is not a lifetime cap. It applies on a seven-year look-back basis, meaning only gifts of qualifying assets made within seven years of death count against it. A gift on which the donor survives seven years becomes a successful PET, falls outside the look-back window, and no longer reduces the allowance available on death. Business owners who make gifts and survive seven years, therefore, free up their allowance for future transfers, though this is the interaction of the standard seven-year PET rules with the new cap, rather than a separate refresh mechanism.
The allowance is transferable between spouses and civil partners. Where a surviving spouse or civil partner has a predeceased partner who did not fully use their own £2.5 million allowance, the unused portion can be transferred, potentially giving the survivor a combined allowance of up to £5 million. Where the first death occurred before 6 April 2026, the full £2.5 million is assumed available for transfer, even if the deceased's estate already claimed BR under the old rules. This allowance is non-transferable between spouses. Each individual will have their own £2.5 million allowance.

Impact on AIM shares:

Currently, AIM shares qualify for 100% BR. From April 2026, they will qualify for only 50% relief on their entire holding and will not count against the £2.5 million allowance. This significantly diminishes their attractiveness as a standalone IHT planning tool.

Lifetime gifts and the rolling allowance:

The £2.5 million allowance operates on a seven-year look-back basis. Qualifying gifts made more than seven years before death fall outside the look-back window and do not reduce the allowance available at death. The practical effect is that business owners who make qualifying lifetime gifts and survive seven years free up their available allowance for future transfers, though this is the consequence of the rolling look-back, not a separate reset mechanism.

Trusts and periodic charges:

Under the relevant property Trust regime, periodic charges apply every 10 years, with an effective rate of up to 6% of the chargeable value. Where qualifying BR assets exceed the available £2.5 million allowance, only 50% relief is available on the excess, meaning the effective periodic charge on that element is equivalent to up to 3% of the chargeable value above the threshold, although the full calculation also involves the Trust's available nil rate band and, for Trusts established before 6 April 2026, transitional adjustments. Professional advice is essential for accurate calculations.

Implications for family businesses with over £2.5 million of qualifying assets

These changes fundamentally alter the calculus for succession planning, particularly for family businesses with shareholdings exceeding £2.5 million.

Increased inheritance tax liability

A £5 million shareholding, currently fully exempt, would see £2.5 million receive only 50% relief, leading to a potential £500,000 IHT liability. This creates a substantial need for liquidity, potentially forcing asset sales and disrupting continuity. The government has confirmed that interest-free instalments over 10 years will be available for all property eligible for agricultural property relief or business property relief, providing important cash flow relief for businesses facing these charges. The government has confirmed that the option to pay IHT by equal annual interest-free instalments over 10 years will be extended to all property eligible for agricultural property relief or business property relief, providing important cash flow relief for businesses facing these charges.

Re-evaluation of business structures

Changes may prompt a re-evaluation of business structures. Incorporating sole traders or partnerships into a limited company could offer flexibility for structured gifting of shares, allowing each family member to utilise their own £2.5 million allowance. However, this introduces Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT) considerations.

Importance of valuations

Accurate and up-to-date business valuations become even more critical for calculating potential IHT liabilities.

Succession planning complexity

Existing wills, shareholder agreements, and trust arrangements will need thorough review and potentially significant revision.

Family considerations

The prospect of part of a family legacy being subject to tax may lead to sensitive discussions and a need for careful planning.

Taking proactive and comprehensive financial planning will be essential to navigate these changes.

Financial planning solutions

Navigating the revised Business Relief landscape requires a multi-faceted approach. A combination of strategies will likely be necessary.

Strategic gifting

Gifting assets during one's lifetime is a powerful IHT planning tool. The new rolling £2.5 million allowance every seven years for lifetime transfers of qualifying business assets presents a significant opportunity.

Direct gifts to individuals:
Gifting shares directly to adult children can remove value from the donor's estate. If the donor survives seven years, the gifted shares fall outside their estate for IHT. Even if the donor dies within seven years, taper relief may apply. The new £2.5 million 100% relief (and 50% thereafter) will apply to BR-qualifying shares if death is on or after 6 April 2026 and the recipient still owns them.
Gifts into Trust:
Gifting shares into a Trust can offer greater control. The new £2.5 million allowance will refresh every seven years for lifetime transfers into Trust. However, periodic and exit charges on Trusts will now apply to values above £2.5 million with only 50% BR.

Tax implications of gifting shares:

Capital Gains Tax (CGT):
Gift Hold-Over Relief can be claimed jointly by the donor and recipient if shares are in an unlisted trading company, deferring CGT until the recipient sells them.
Inheritance Tax (IHT):
A Potentially Exempt Transfer (PET) to an individual becomes fully exempt if the donor survives seven years. A Chargeable Lifetime Transfer (CLT) to a Trust might incur an immediate 20% IHT charge if it exceeds the nil rate band. The new £2.5 million BR allowance will apply to these lifetime transfers.

Strategic considerations for gifting:

Timing: Making gifts sooner maximises the benefit of the seven-year rule and the new rolling £2.5 million BR allowance.
Control: Gifting shares can mean loss of control. Non-voting shares or robust shareholder agreements can address this.
Valuation: Accurate share valuation is essential for IHT and CGT.
Spousal rebalancing: Although unused allowances can transfer between spouses on death, rebalancing business assets between them during lifetime remains a valuable strategy. It ensures that both spouses actually hold qualifying assets against which to use their individual allowances, — particularly important for lifetime gifting, where only the person making the gift can use their own allowance. It also simplifies the estate position and reduces reliance on a post-death transfer claim.

It is worth noting that, from 6 April 2026, direct transfers of qualifying business property between spouses and civil partners are only eligible for 50% BR. While the spousal exemption typically prevents an immediate IHT charge on such transfers, this restriction affects how the relievable value is calculated in complex estate scenarios, particularly where the estate includes both exempt and non-exempt beneficiaries. The interaction provisions under s39A IHTA 1984 mean advice should be sought on the specific estate structure.

Restructuring the business

Revisiting the business structure can unlock further planning opportunities.

Partnerships and incorporation:
Incorporating sole traders or partnerships into a limited company can allow for easier share transfers and structured gifting.
Share reorganisation:
Companies can reorganise share capital to create different classes (e.g., voting and non-voting shares) to facilitate gifting while retaining control.
Diversification of assets:
Reviewing ‘excepted assets’ is crucial. Strategic use of excess cash (e.g., reinvesting in trading activities) can maximise BR.

Utilising life insurance to cover IHT liability

Life insurance can provide the necessary liquidity to cover tax bills, preventing forced sales of business assets.

Whole of Life cover

When appropriate:
Suitable for non-active investors (e.g., retired directors and passive shareholders) or for covering general IHT liabilities beyond business assets. For clients without active involvement in a business, Whole of Life cover written into Trust is a common solution for broader IHT liabilities, subject to health, affordability, and individual circumstances.
How it works:
Provides a payout on death, subject to premiums being maintained throughout the life of the policy. Premiums can be offered on a guaranteed (fixed) or reviewable basis. Reviewable premiums can increase significantly over time, particularly in later life, and a policy may become unaffordable or lapse if premium increases cannot be met. Joint life second-death policies are common for couples.
Benefits for business owners: Provides robust, long-term liquidity for IHT, preventing the need to sell business assets at unfavourable times. Offers immediate effectiveness and peace of mind.
Considerations: Premiums for Whole of Life policies are typically more expensive than term assurance due to the guaranteed payout. They are paid from taxed income. Some policies may have reviewable premiums, meaning the cost can increase significantly over time, particularly in later life or if investment returns within the policy underperform, potentially making the policy unaffordable.

Relevant Life Policies (RLP)

When appropriate: For actively participating employees or directors of the company.
How it works: An employer takes out a policy on an employee's life, usually written into a discretionary Trust from the outset, with the employee's family as beneficiaries. Premiums are typically treated as an allowable expense for corporation tax. No P11D benefit-in-kind is created, and the payout is IHT-free via the Trust. Proceeds do not count towards the individual's pension Lump Sum and Death Benefit Allowance.
Benefits for business owners: A tax-efficient way to provide personal life cover and fund IHT, particularly for the additional liability created by the new BR cap.
Considerations: Relevant Life Policies typically cease on the insured's 75th birthday or cannot be taken out if the insured is already aged 74 or older. This means they are not suitable for providing cover beyond this age, which is an important consideration for individuals planning for very long-term or later-life IHT liabilities.

Gift Inter Vivos (GIV) Policy (seven-year cover)

When appropriate:
Specifically designed to cover potential IHT liability if a donor dies within seven years of making a Potentially Exempt Transfer (PET), like gifting shares directly to an individual.
How it works:
If a donor dies within seven years of a PET, the gift ‘fails’, and its value is brought back into the estate for IHT calculation. The IHT liability falls on the recipient. A GIV policy is taken out by the donor on their own life, written into a Trust, ensuring IHT-free proceeds to Trustees who can then distribute funds to beneficiaries to pay the IHT. Many GIV policies have a decreasing sum assured to mirror taper relief.
Benefits for business owners:
Provides necessary liquidity to pay IHT on failed gifts, preserving gifted business shares and ensuring legacy continuity. Offers peace of mind to the donor.
Considerations:
Medical underwriting affects availability and cost. Premiums are paid from taxed income. For BR-qualifying gifts, the sum assured must account for the new £2.5 million 100% BR cap; if the gift exceeds this, the policy covers IHT on the portion receiving 50% BR.

Reviewing Wills and succession plans

A thorough review of wills and overall succession plans is imperative. Existing wills may no longer be tax-efficient. Shareholder agreements should align with the new IHT landscape. Lasting Powers of Attorney (LPAs) are crucial. Trusts remain valuable, but their application needs re-evaluation due to the new £2.5 million cap across all trusts created by an individual.

Considering investment strategies

Reviewing investment strategies for surplus cash can be beneficial. Reinvesting excess cash into genuine trading assets can help ensure maximum BR. Diversification into other asset classes might be appropriate for those with significant wealth in BR-qualifying assets, balanced with maintaining business control.

Engaging professional advice

Seeking professional advice from experienced financial planners, tax advisors, and legal professionals is paramount given the complexity. A holistic approach is essential to assess liability, develop a bespoke plan, ensure compliance, and facilitate family conversations.

Conclusion: A proactive and integrated approach

The changes to Business Relief that took effect from 6 April 2026 mark a significant shift in IHT planning for family-owned businesses with substantial qualifying assets. For businesses with over £2.5 million in qualifying assets, a proactive and integrated financial planning strategy is now essential to protect legacies, ensure continuity, and avoid potentially significant IHT liabilities.

The rules are now in force. Business owners who have not yet reviewed their position should act promptly, the earlier a structured review takes place, the wider the range of planning options available.

Planning opportunities and priorities under the new rules:

Reviewing existing wills and trust arrangements. Wills and Trust deeds drafted before April 2026 may no longer achieve their intended IHT outcome. The interaction of the £2.5 million allowance with existing Trust structures, particularly the rule that the allowance applies across all Trusts created by the same settlor needs to be assessed carefully.
Considering lifetime gifting strategy. The seven-year look-back means that gifts of qualifying business property made now, where the donor survives seven years, will fall outside the allowance calculation on death. For business owners with substantial holdings, a structured gifting plan, whether directly to family members or into Trust, can materially reduce the long-term IHT exposure. The £2.5 million allowance applies to the person making the gift, so gifting from the spouse or partner with the larger qualifying holding may be the more efficient approach.
Assessing the insurance gap. For businesses where the value of qualifying assets exceeds £2.5 million (or £5 million for couples), the 20% effective IHT rate on the excess creates a concrete liability. Life insurance, whether Whole of Life cover in Trust, a Relevant Life Policy for active directors, or a Gift Inter Vivos policy to bridge the seven-year survival period on a lifetime gift, should be reviewed against the size of that liability.
Spousal rebalancing. Even with the transferability of unused allowances, ensuring both spouses hold qualifying assets remains valuable for lifetime planning purposes. Business owners should review how shareholdings and business interests are structured between them.
Managing the transitional period. Gifts of qualifying business property made between 30 October 2024 and 5 April 2026 fall within the transitional rules and are subject to the new regime if the donor dies within seven years. Any such gifts should be identified, valued, and reflected in insurance arrangements accordingly.

A comprehensive planning approach will likely involve:

Strategic gifting: Maximising the new £2.5 million rolling allowance for lifetime transfers, alongside traditional PETs.
Business restructuring: Reviewing corporate structures to ensure IHT-efficiency and facilitate succession and gifting.
Life insurance solutions: Whole of Life cover (in Trust) for broader IHT liabilities, Relevant Life Policies for owner-directors, and Gift Inter Vivos policies to bridge the seven-year survival period for significant lifetime gifts.
Will and succession plan review: Updating documents to reflect new BR rules and family wishes.
Professional guidance: Collaborating with experienced financial planners, tax advisors, and legal experts.

The aim is not simply to minimise tax, but to ensure the smooth transition of the business to the next generation, preserving the legacy of what has been built. With the new rules now firmly in place, the time to review, restructure, and protect is now and the earlier that review takes place, the greater the range of options available.

The aim is not just to minimise tax but to ensure the smooth transition of the business to the next generation, preserving the hard work and dedication that built it. By understanding the new rules and implementing a well-thought-out plan, family businesses can face the future with confidence, ensuring their legacy endures for generations to come. The time to plan is now, to turn potential challenges into opportunities for robust and resilient succession.

Important considerations: Business Relief qualifying status is not guaranteed. HMRC may challenge a company's trading status, the valuation of business assets, or the application of reliefs, including the excepted assets rule, which can deny relief on assets not actively used in the business. Gifting strategies involve the permanent transfer of value and control. Life insurance cover is subject to medical underwriting and will lapse if premiums are not maintained. The planning strategies described in this article may not be appropriate for all individuals. You should seek personalised advice from a qualified financial advisor, tax advisor, and legal professional before taking any action.

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