Inheritance Tax (IHT) in the UK is a tax on the estate (property, money, and possessions) of someone who has passed away.
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Inheritance Tax (IHT) Changes for Business Owners: Planning Ahead for 2026

The Autumn Budget 2024 introduced major changes to Business Property Relief (BPR) and Agricultural Property Relief (APR), which will significantly impact business owners and their families. The new £1 million cap on IHT relief for business assets means that many businesses will now face unexpected IHT liabilities, requiring proactive estate planning before April 2026.

What Are the Changes?

Currently, business assets can qualify for 100% IHT relief through BPR or APR, effectively shielding them from the 40% inheritance tax rate. However, from 6 April 2026:

  • The 100% IHT exemption will be capped at £1 million per taxpayer.
  • Any business assets above this threshold will only receive 50% relief—meaning they could face a 20% effective IHT rate on death.
  • Lifetime transfers made on or after 30 October 2024 will be subject to the cap if the donor dies within seven years of the gift.
  • The cap is not transferable between spouses, so careful ownership structuring is required.

Who Will Be Affected?

  1. Business owners with assets exceeding £1 million will no longer be fully exempt from IHT.
  2. Agricultural businesses will also see a 50% limit on APR for assets exceeding £1 million.
  3. AIM-listed and ICAP shares will only qualify for 50% relief, reducing their attractiveness for estate planning.
  4. Trusts created after 30 October 2024 will share a single £1 million cap, increasing IHT exposure.

How to Plan Ahead for the 2026 IHT Changes

Given these changes, business owners must review their succession and tax planning strategies now to avoid significant IHT bills.

1. Utilising the £1 Million Cap Efficiently

Since the cap is per taxpayer, business owners should consider:

Rebalancing ownership between spouses

  • If one spouse owns all business assets, consider transferring part of the business to the other spouse.
  • This would allow both partners to use their individual £1 million IHT cap, potentially shielding £2 million from IHT.

Valuing business assets to assess IHT exposure

  • Businesses will need formal valuations to determine their IHT liability after 2026.
  • Many substantial businesses will exceed the £1 million cap, requiring additional planning.

Reviewing business structures

  • Sole traders and business partnerships may face greater IHT exposure due to their structure.
  • Incorporating the business or adjusting ownership among family members can optimise tax relief.

2. Gifting Business Assets Before 2026

Making lifetime gifts before the changes take effect

  • If business assets are gifted before April 2026, they may still qualify for 100% IHT relief.
  • Lifetime gifts will be subject to the 7-year rule, meaning that no IHT is due if the donor survives for 7 years.

Key Risks:

  • If the donor dies before April 2026, the assets still qualify for full BPR.
  • However, if the donor dies after April 2026 and within seven years of the gift, the new £1 million cap will apply.

Example:
Tom gifts his £4 million farming business to his children in January 2025 but dies in May 2028.

  • Without planning, £3 million of business assets would only receive 50% relief, creating an IHT bill of £480,000.
  • Had Tom transferred part of the business to his spouse first, he could have used multiple IHT caps, reducing the liability.

3. Using Trusts to Reduce IHT Exposure

Trusts can still protect business assets, but only up to £1 million per settlor.
Multiple trusts created before 30 October 2024 will each have separate caps.
If a settlor dies after 6 April 2026, the cap applies to lifetime transfers made from 30 October 2024 onwards.
Review existing trusts and consider restructuring ownership before the new rules take effect.

Trust Warning:

  • Trusts created after 30 October 2024 share a single £1 million cap, making them less effective for IHT planning.
  • However, existing trusts before this date can still use separate relief caps, meaning early planning is crucial.

4. Consider Business Partnerships and Incorporation

Converting a sole trader business into a partnership

  • Adding a spouse or adult child as a partner allows each partner to use a £1 million cap, spreading relief across multiple individuals.

Incorporating the business

  • Business owners can convert their sole trade or partnership into a limited company.
  • Company shares qualify for BPR, allowing structured gifting to family members.
  • However, watch out for capital gains tax (CGT) and stamp duty land tax (SDLT) liabilities when incorporating.

Example:
Logan, a sole trader, passes away in May 2026, leaving all shares to his wife, Marcia. Since this is a spousal transfer, it is IHT-exempt.

  • If Marcia dies in 2029 and leaves the business to their children, it now faces IHT under the new £1 million cap.
  • If Logan had split ownership with his children earlier, he could have minimised IHT exposure.

5. Planning for IHT Payments

Even with careful planning, some IHT may still be payable. The main concern for business owners is how to fund the tax bill without selling assets.

Paying IHT in Instalments

  • Business assets qualify for interest-free IHT instalments over 10 years.
  • However, the first payment is due six months after death, so cash flow planning is essential.

Using life insurance to cover IHT liabilities

  • A whole-of-life insurance policy placed in trust can cover the IHT bill, preventing the need to sell business assets.
  • Premiums are typically more affordable when planned early.

Structuring a buy-sell agreement for business succession

  • If multiple partners are involved, a cross-option agreement allows the business to buy out the deceased owner’s share.

Final Thoughts: Steps to Take Before 2026

With the new BPR cap coming into effect from April 2026, business owners must act now to mitigate IHT liabilities.

Key Action Points:

✔ Assess business valuations to determine IHT exposure.
✔ Rebalance ownership between spouses to use both £1 million caps.
✔ Make lifetime gifts of business assets before April 2026 to secure full relief.
✔ Review existing trusts—those created after 30 October 2024 will share a single cap.
✔ Consider partnerships or incorporation to spread tax relief among multiple individuals.
✔ Plan for IHT liabilities through instalment payments, life insurance, or buy-sell agreements.

How Merranti Accounting Can Help

At Merranti Accounting, we specialise in IHT planning for business owners, helping you navigate these changes before they take effect in 2026.

Book a consultation with our tax experts today to:
Assess your business’s IHT exposure
Develop a tax-efficient succession plan
Explore gifting, trust, and incorporation strategies

Plan ahead now to protect your business and your family’s wealth. Contact Merranti Accounting today.

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