There’s been an important change to inheritance tax relief for business owners: Here’s what you need to know

As a business owner, building a successful company is only part of your journey. If you want to leave a meaningful legacy, planning how and when to pass your company to the next generation is just as important.

A key consideration is inheritance tax (IHT), as without careful planning, this could significantly reduce the value passed on to your beneficiaries and harm your family’s financial security.

As such, business relief (BR) has been a powerful estate planning tool for entrepreneurs since it was introduced in 1976. BR was designed to protect family businesses and support intergenerational transfers by lowering the taxable value of business assets for IHT purposes.

However, the government announced major reforms to BR in its 2024 Autumn Budget, and these changes took effect on 6 April 2026.
Keep reading to learn how the new rules work and discover practical steps you could take to pass your business wealth on as tax-efficiently as possible.

The 100% business relief rate for inheritance tax has been capped

Historically, BR was broadly uncapped, with most qualifying business assets eligible for 100% relief, while only a select few received 50%.
Agricultural relief (AR) is an adjacent relief that gives farm owners similar tax benefits.

Under the new rules, 100% IHT relief is now capped at a combined total of £2.5 million for farm and business assets.

For any BR or AR qualifying assets that exceed this allowance, the relief drops to 50%; there’s no limit on the value of assets that can receive this reduced relief. As the standard UK IHT rate is 40%, this creates an effective 20% rate.

If you don’t use your £2.5 million allowance in your lifetime, any leftover amount can be transferred to your surviving spouse or civil partner. As such, you could collectively pass on up to £5 million IHT-free. This applies even if the first partner passed away before April 2026.

In addition to this cap on AR and BR, as of April 2026, shares listed on the alternative investment market (AIM) now only qualify for 50% IHT relief, compared to 100% previously under BR. AIM shares do not count towards the £2.5 million allowance but instead are taxed at a flat 20% effective rate on death regardless of the estate’s size.

To help people manage the potential increase in liability these changes could trigger, the government has extended the option to pay an IHT bill in 10 equal instalments interest-free. The IHT on all qualifying BR and AR assets, including those falling into the 50% relief bracket, can now be paid in this way.

What these changes could mean for your business

Now that the 100% IHT relief on qualifying business and farm assets has been limited to a total of £2.5 million, you might find that your estate is exposed to IHT, whereas previously it was not.

Alternatively, you could see your liability increase as more of your assets exceed the threshold and trigger a 20% IHT charge.

If you created your succession and estate plan based on the assumption that your business assets would pass on IHT-free, these strategies may no longer deliver the outcomes you intended.

Moreover, if a significant portion of your wealth is tied up in illiquid business assets, your beneficiaries may struggle to pay an IHT bill that could be higher than expected. This could force them into difficult decisions, such as selling assets, which could disrupt operations and affect long-term business plans.

The extended 10-year interest-free payment scheme could provide sufficient time and flexibility for raising the necessary funds. However, this will depend on how much additional IHT the new rules have added to your estate and the income your business generates.

Practical steps you could take now to protect your estate and keep your succession plan on track

While these reforms might seem daunting, there are steps you could take to mitigate their impact on your business or farm, including:

Review your IHT liability and update your estate plan

Speak to your financial planner, who will help you understand your eligibility for BR and AR. They can then revise your IHT calculations using the new £2.5 million cap and 50% relief rate for qualifying assets above this amount.

Once you have a clear understanding of your IHT liability under the new rules, your planner can help you update your estate plan to ensure your business passes on as tax-efficiently as possible.

Gift wealth strategically during your lifetime

Gifting some of your business assets during your lifetime could reduce the value of your estate over time, which may reduce a potential IHT bill.

There are several annual allowances and exemptions you could use to make IHT-free gifts. Any other lifetime gifts you make are usually classed as potentially exempt transfers (PETs) and fall outside your estate if you survive for seven years after making them.

However, it’s important to note that if you make a qualifying gift on or after 30 October 2024 and die within seven years, it’s treated as a failed PET and counts towards your £2.5 million allowance at the time of your death.

Share ownership of qualifying assets between spouses

Remember that the £2.5 million cap applies to each individual, and spousal transfers are IHT-free. As such, sharing ownership of qualifying assets could help you reduce a potential IHT bill.

For example, if you own £4 million of BR-qualifying assets, £1.5 million of this will exceed the threshold for 100% relief and trigger a 20% IHT charge. In contrast, by transferring £2 million to your civil partner or spouse, you’ll each remain within your £2.5 million allowance and, as such, be entitled to 100% relief on qualifying assets.

Consider putting life assurance in a trust

You may not be able to completely mitigate any increase in your estate’s IHT liabilities following the April 2026 reforms.

As such, taking out appropriate life assurance and placing it into a trust could provide your beneficiaries with a tax-free lump sum they can use to pay any IHT due without having to sell business assets.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate tax planning.