Business Relief 2026
Planning for business owners with over £1 million of qualifying assets
Inheritance Tax (IHT) has long been a complex issue in the UK, often forcing families to make difficult decisions about inherited wealth and family businesses.
The threat of a significant tax bill upon death can necessitate the sale or dismantling of a thriving enterprise, jeopardising jobs, legacies, and community ties. 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 are set to come into effect from April 2026, profoundly impacting how family businesses with substantial qualifying assets plan for their future. This article will delve into these changes, their implications for family businesses with over £1 million in qualifying assets and explore financial planning solutions to navigate this new era.
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:
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 imminent changes: April 2026
Following the government's publication of draft legislation on July 21, 2025, significant reforms to Business Relief (and Agricultural Property Relief) are confirmed to come into effect from April 2026.
The £1 million cap
The most impactful change is the introduction of a £1 million cap on 100% Business Relief.
- From April 2026, the first £1 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 £1 million.
- This £1 million allowance operates on a seven-year rolling basis rather than as a lifetime cap. This means business owners can make periodic gifts of qualifying assets up to £1 million every seven years without permanently using up their allowance. The allowance encompasses the value of all qualifying assets in the estate on death, including failed gifts made within seven years of death, and lifetime transfers into trustThe allowance will be indexed in line with the Consumer Prices Index from 2030-31 onwards but remains fixed until tax year 2029-30.
- This allowance is non-transferable between spouses. Each individual will have their own £1 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 £1 million allowance. This significantly diminishes their attractiveness as a standalone IHT planning tool.
Lifetime gifts and the rolling allowance:
The £1 million allowance will refresh on a rolling basis every seven years for lifetime transfers. Business owners may be able to make periodic gifts of qualifying unquoted shares up to £1 million to a trust or directly to family members every seven years without triggering an immediate IHT charge. Lifetime gifts and settlements made more than seven years before death will still be excluded from IHT, and taper relief may apply for gifts made between three and seven years before death. This seven-year refresh mechanism has now been confirmed in the draft legislation, providing greater certainty for long-term succession planning strategies.
Trusts and periodic charges:
Under the new rules, trusts holding business property will now face periodic charges (effectively 3% on the value above £1 million, as only 50% relief applies). The £1 million BR allowance will apply across all trusts created by an individual, preventing the use of multiple trusts to multiply the relief. This requires a more strategic approach to estate planning involving trusts. Importantly, trusts established before 6 April 2026 will receive a proportionate reduction to their first 10-year charge, taking into account the period when they qualified for unlimited 100% relief, avoiding a harsh cliff-edge effect.
Implications for family businesses with over £1 million of qualifying assets
These changes fundamentally alter the calculus for succession planning, particularly for family businesses with shareholdings exceeding £1 million.
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.
Gifting assets during one's lifetime is a powerful IHT planning tool. The new rolling £1 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 £1 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 £1 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 £1 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 £1 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 £1 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: Transferring part of a business to a spouse allows both to utilise their individual £1 million BR cap, potentially shielding £2 million for the couple.
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.
Life insurance can provide 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, passive shareholders) or for covering general IHT liabilities beyond business assets. This is usually the default insurance policy for anyone looking to insure against an IHT liability. - How it works:
Guarantees a payout whenever the insured person dies. Must be written into a suitable trust from inception to ensure IHT-free proceeds. Premiums can be guaranteed or reviewable. 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 £1 million 100% BR cap; if the gift exceeds this, the policy covers IHT on the portion receiving 50% BR.
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.
Conclusion: A proactive and integrated approach
The impending changes to Business Relief in April 2026 mark a significant shift in IHT planning for family-owned businesses with substantial qualifying assets. For businesses with over £1 million in qualifying assets, a proactive and integrated financial planning strategy is now essential to protect legacies, ensure continuity, and avoid potentially crippling IHT liabilities.
The core message for business owners is clear: keep in regular contact with your financial adviser so you can act when the full details are known. Waiting until closer to April 2026 will severely limit planning options and could result in considerable financial penalties.
Opportunities missed by inaction before April 2026
- Maximising 100% BR on lifetime gifts: Strategic gifts of BR-qualifying assets before April 2026 could potentially leverage the existing 100% uncapped relief if the donor survives seven years. Post-April 2026, any value exceeding the new £1 million allowance will immediately fall to 50% relief.
- Optimal use of spousal rebalancing: Delaying rebalancing means one spouse’s entire £1 million individual BR allowance might not be fully utilised if they pass away before the rebalancing, exposing the estate to unnecessary tax.
- Establishing life insurance with favourable terms: Premiums are typically lower when younger and healthier. Delaying means facing potentially higher premiums or difficulties securing cover.
- Strategic trust planning under current rules: Some benefits or flexibility under current uncapped BR rules might be lost if transfers into trust are delayed beyond April 2026.
- Avoiding forced asset sales: Failing to prepare for a substantial IHT bill could force the sale of valuable business assets, undermining the family's legacy and the business's long-term viability.
A comprehensive planning approach will likely involve
- Strategic gifting: Maximising the new £1 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.
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DisclaimerCrowe Financial Planning UK Limited is authorised and regulated by the Financial Conduct Authority (FCA) to provide independent financial advice. The Financial Conduct Authority does not regulate Trusts, Tax or Estate Planning. |
