Inheritance tax business relief changes

What is inheritance tax business relief?

Business relief (BR) is an inheritance tax relief which applies to qualifying business assets. It was originally introduced in 1976 to allow businesses to be passed down either inheritance tax (IHT) free or at a reduced rate without the family of the deceased having to sell the business.

What are the current rules?

BR is available to business owners who hold qualifying business assets for at least two years and continue to hold them on their death.

100% relief is available for:

• A sole trader or partner interest in a trading business.
• A holding of shares in an unquoted company, including shares listed on the Alternative Investment Market (AIM companies).
• Enterprise Investment Schemes (EIS).

50% relief is available for:

• A controlling holding of shares in a quoted company.
• Land, buildings, machinery or plant used wholly or mainly for the purposes of the business.

What is changing from 6 April 2026?

From 6 April 2026 the 100% relief will be subject to a £1 million cap. This £1 million allowance will apply to combined qualifying business (including EIS companies) and agricultural assets. 50% relief will then be available on qualifying assets more than the £1 million allowance.

Furthermore, holdings of shares in companies designated as “not listed” on the markets of recognised stock exchanges (AIM companies and EIS companies quoted on AIM), will only be entitled to relief at 50%.

Quoted shares which give control of the company and assets used in the business will continue to benefit from 50% relief.

Assets that automatically receive 50% relief will not use up the £1 million allowance and if not fully used on death the unused allowance cannot be transferred between spouses and/or civil partners.

Let’s look at an example:

£3 million in shares with £500,000 in land and machinery, where no other reliefs are available.

Death occurs before 6 April 2026:

• £3 million fully exempt.
• 50% relief on £500,000 land and machinery.
• Total tax to pay £100,000 (£250,000 @ 40%).
• Effective rate of tax 2.86% ((£100,000/£3.5 million) x 100%)).

Death occurs on or after 6 April 2026:

• First £1 million fully exempt.
• 50% relief on next £2 million.
• Tax to pay on qualifying business assets £400,000 (£1 million @ 40%).
• 50% relief on £500,000 land and machinery.
• Tax to pay on land and machinery £100,000 (£250,000 @ 40%).
• Total tax to pay £500,000 (£400,000 + £100,000).
• Effective rate of tax 14.29% ((£500,000/£3.5 million) x 100%)).

The changes will apply during lifetime and on death, meaning that you will need to consider the £1 million allowance on gifts of qualifying assets on or after 30 October 2024 where the donor dies on or after 6 April 2026.

The government will publish a technical consultation in early 2025 which will focus on how the allowance will apply to lifetime transfers into trusts and charges on the trust property.

Things to consider

• As the unused allowance cannot be transferred, wills may need to be reviewed to ensure that spouses and civil partners can each benefit from the allowance. Business owners will need adequate professional valuations to understand how much allowance they will have.
• Businesses may consider bringing forward succession planning by introducing family members earlier and gift shares during lifetime with the hope of surviving seven years. Professional advice with need to be sought regarding both the legal and tax implications.
• Consideration could be given to effect a life policy in trust to meet the new inheritance tax liability.