Inheritance Tax Changes April 2026: What UK Business Owners Need to Know
This article details out the key insights from a recent expert webinar hosted by Jenny Jones of Dragon Argent, featuring strategic tax adviser Sanjay Kukar. The UK's tax landscape is evolving, and for business owners, understanding these changes is not just prudent, it's essential for safeguarding the value you have worked so hard to build. As Sanjay Kukar advises, if no action is taken, the consequences "can be very expensive at the end of the day."
The purpose of this guide is to provide UK business owners with a clear, accessible understanding of Inheritance Tax (IHT), the significant upcoming changes to Business Property Relief (BPR), and the strategic actions that can be taken now to protect personal and business assets. It is an essential tool for avoiding significant financial loss.
The following question-and-answer format is designed to address the most pressing questions business owners have on this complex topic, breaking down intricate rules into actionable intelligence.
1.0 Understanding the Fundamentals of Inheritance Tax (IHT)
To navigate the complexities of estate planning, a firm grasp of the basic mechanics of Inheritance Tax is the essential first step. Before exploring advanced strategies or the impact of recent changes, it is crucial to understand the foundational rates, allowances, and principles that govern how an estate is taxed.
Q1: What is Inheritance Tax and who pays it?
Inheritance Tax (IHT) is a tax levied on the total value of a person's estate including their property, cash, investments, and business shares, when they pass away. Described by strategic tax adviser Sanjay Kukar as effectively a wealth tax, it is charged by HMRC on the deceased individual's estate. The headline tax rate is a significant 40% on the value of the estate that exceeds the available tax-free allowances.
Q2: How much of my estate is tax-free?
Every individual in the UK is entitled to certain tax-free allowances that can reduce or eliminate their IHT liability. The primary allowances are:
Nil Rate Band (NRB): This is the standard tax-free allowance available to every individual, set at £325,000. The first £325,000 of an estate's value is not subject to IHT.
Residence Nil Rate Band (RNRB): This is an additional allowance of £175,000. To qualify, two key conditions must be met:
The estate's total net value (after deducting debts like mortgages) must be below £2 million (an allowance which begins to taper away for estates valued above this amount).
A main residence must be passed on to direct descendants, which includes children and grandchildren.
Together, these can provide an individual with a total tax-free allowance of up to £500,000.
Q3: How do these allowances work for married couples or those in civil partnerships?
A key feature of the IHT system is the transferability of these allowances between spouses and civil partners. When the first partner passes away and leaves their entire estate to the surviving spouse, their unused NRB and RNRB can be transferred. This effectively doubles the potential tax-free threshold for the couple.
As a result, a married couple or civil partnership can potentially pass on a total of £1 million to their descendants completely free of Inheritance Tax (£500,000 from each partner).
Q4: Is it true that most estates don't pay Inheritance Tax?
You may have heard the statistic that only around 6% of UK estates pay IHT. However, this figure can be misleading. It includes the vast number of estates that pass from one spouse to another upon the first death. Transfers between spouses are entirely exempt from IHT, meaning no tax is paid at that stage, regardless of the estate's value.
This spousal exemption is not an elimination of the tax but rather a deferral. The IHT liability crystallises when the second spouse passes away and the combined estate is passed on to the next generation. At that point, the full value of the estate above the combined £1 million allowance will be subject to the 40% tax.
While these general allowances provide a baseline, the impending changes to Business Property Relief introduce a specific and significant threat that requires immediate attention from every business owner.
2.0 The Critical Change for Business Owners: Business Property Relief (BPR)
While IHT has been a long-standing feature of the UK tax system, a specific and significant change to a key relief is creating a new and substantial tax risk for many private business owners. This impending reform to Business Property Relief (BPR) is the primary driver for this strategic review.
Q5: What is Business Property Relief and how is it changing?
Historically, Business Property Relief has been one of the most valuable reliefs for business owners.
Its Past Function: BPR traditionally allowed business owners to pass on their qualifying company shares to the next generation with 100% relief from IHT. A business worth £10 million could be passed down entirely tax-free, ensuring a smooth transition of ownership without a crippling tax bill.
The Impending Change: Effective from April 2026, this unlimited relief is being removed. BPR will be capped at a £1 million allowance per individual. Any BPR qualifying assets an individual owns above this £1 million threshold will be subject to tax at a rate of 20%. This not only creates a tax liability but also a severe operational risk: as the shares are tied up in the probate process, the company may be unable to function, paralysing the business and impacting the family and employees.
Q6: Does every business qualify for Business Property Relief?
No, BPR is not automatic. There are strict eligibility criteria that must be met:
Company Type: The relief is only available for shares in a privately owned, unquoted "trading company." It does not apply to "investment companies" those whose primary activity is investing in assets like property or stocks.
Holding Period: The owner must have held the shares for a minimum of two consecutive years prior to the transfer (either during their lifetime or upon death).
Q7: Can a trading company accidentally become an "investment company" and lose the relief?
Yes, a company's status is not fixed and can change over time, creating a hidden risk. For example, a successful consultancy firm may be a trading company for many years. However, if trading activity ceases and the company retains a large amount of accumulated cash, its character can shift.
HMRC uses a general rule of thumb where at least 80% of the company's value and activity must be derived from trading. If a significant portion of the company's value becomes tied up in non-trading assets like cash or investments, it can be reclassified as an investment company. This would result in a complete loss of eligibility for BPR, exposing its full value to IHT. Therefore, a company's BPR eligibility is not a one-time assessment but requires ongoing vigilance, especially for cash-generative businesses that are nearing the end of their active trading life.
Understanding this critical change to BPR is the first step; the next is exploring the legitimate planning strategies available to mitigate its impact.
3.0 Strategic Planning: How to Reduce Your IHT Exposure
Proactive estate planning is not about finding tax loopholes; it is about using legitimate and established tools to manage your future liabilities, particularly in light of the new BPR rules. The following strategies are essential considerations for any business owner looking to protect their legacy.
Q8: What are the main strategies for reducing the value of an estate?
The most direct way to reduce your IHT liability is to reduce the value of your estate. The primary strategy for this is gifting assets during your lifetime. This is governed by the "seven-year rule": if you make a gift to another person and survive for seven years after making it, the value of that gift is removed from your estate for IHT purposes.
Q9: What are the tax risks of gifting assets like property or company shares?
While gifting can be an effective IHT strategy, it can trigger a different tax: Capital Gains Tax (CGT). For tax purposes, gifting an asset is treated as if you sold it at its current market value. This means you, the giver, could face a significant CGT bill on the "gain" in the asset's value since you first acquired it.
This creates what is known as a "dry tax charge" a tax liability that arises without you receiving any cash from a sale. This presents a major risk: you could pay a substantial CGT bill on the gift, only for the asset to fall back into your estate for IHT purposes if you were to pass away within seven years. In this scenario, you could suffer a double tax hit, with no credit given for the CGT already paid.
Q10: Is there a more tax-efficient way to gift company shares?
Yes, for shares in a trading company, there is a valuable tool called Holdover Relief. This relief allows you to gift the shares without triggering an immediate CGT charge. The capital gain is effectively "held over" or deferred.
The recipient of the shares inherits your original cost base. This means that CGT will only become payable when they eventually sell the shares in the future. While this is a highly tax-efficient method, it's important to manage the non-tax risks, such as the loss of control over the business, which can be addressed through careful legal structuring.
Q11: How can a Family Trust help protect my business and family?
Using a trust is a sophisticated strategy that offers benefits beyond tax efficiency, providing robust protection and control.
Asset Protection: Assets placed in a trust are legally owned by the trust, not by the individual beneficiaries. This provides a critical layer of protection. For example, if your child were to go through a divorce, the assets held in the trust would not form part of their personal estate and would be shielded from the settlement.
Control: As the person setting up the trust (the settlor), you can also act as a trustee. This allows you to retain control over the management and distribution of the assets, even though they are no longer part of your personal estate for IHT purposes.
The BPR Opportunity: This is a crucial, time-sensitive point. This strategy allows for the tax-free transfer of a business of any value into a protected structure, an opportunity that will be permanently lost for valuations over £1 million after April 2026. Under the current rules, you can use the 100% Business Property Relief to transfer qualifying company shares into a trust before April 2026 without incurring any lifetime IHT.
Q12: My spouse and I have "mirrored wills." Are they still effective under the new rules?
Traditional mirrored wills, where each spouse leaves everything to the survivor, now pose a significant risk for business owners. The new £1 million BPR allowance is a "use it or lose it" provision for each individual. Critically, unlike the standard Nil Rate Bands, an unused BPR allowance does not transfer to the surviving spouse.
This means that for business-owning couples, the traditional 'leave everything to my spouse' strategy is no longer just a deferral tactic; it is now an active forfeiture of a valuable £1 million tax relief. If the first partner to pass away leaves all their business shares to the surviving spouse, their personal £1 million BPR allowance is wasted. It is now essential for business owners to update their wills to ensure the first partner's will directs their BPR-qualifying assets (up to the £1 million limit) to their children or into a trust, thereby utilising their allowance and preventing it from being lost.
These active planning strategies must be weighed carefully to ensure a holistic and appropriate approach for your specific circumstances.
4.0 Final Considerations and Next Steps
Effective estate planning is not about applying a single solution. It requires a comprehensive review of your entire financial situation to determine the most appropriate blend of strategies that aligns with your unique circumstances and long-term goals.
Q13: What is the single most important action I should take now?
The most critical first step is to conduct a full and detailed review of your entire estate, encompassing both your personal and business assets. The objective of this review is to:
Calculate the potential IHT liability: Determine the estimated tax due on your estate today if these rules were already in effect.
Identify which of your assets qualify for specific reliefs, such as Business Property Relief and ensure you retain the qualifying conditions.
Develop a tailored plan that aligns with your personal goals, family circumstances and overall risk tolerance.
This holistic assessment will provide the clarity needed to make informed decisions and implement the most effective strategies for your situation.
Finally, it is worth noting that the government may provide further details and clarification on these new rules in the upcoming Autumn Budget. The expert guidance and analysis in this document were provided by our strategic tax adviser Sanjay Kukar, who continue to monitor these developments closely.
👉The upcoming changes to Business Property Relief could significantly affect how your business and wealth are passed on. Don’t leave your legacy to chance, schedule a call with Sanjay Kukar to get expert guidance on safeguarding your assets and minimising inheritance tax.
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