4 ways to reduce your inheritance tax exposure after exiting your business

No matter how passionate you are about your business, there will likely come a time when other priorities become more important. You might be ready to retire and spend more time with loved ones, or perhaps you’re eager to pursue a new venture.

Whatever’s driving your desire for change, exiting your business is a major life transition that requires careful financial planning.

One key consideration is the inheritance tax (IHT) implications of selling. While your business might qualify for business relief (which could reduce a potential IHT bill), sale proceeds generally do not because they’re no longer considered trading assets. As such, exiting could increase your personal wealth in the short term, but also create a larger taxable estate for your beneficiaries.

Fortunately, careful financial planning could help you mitigate a potential IHT bill for your loved ones. Here are four steps you might want to consider taking once you’ve sold your business.

1. Get a clear overview of your new financial position

As a business owner, you may have a significant amount of wealth tied up in your company. Selling could leave you with a much larger pool of personal assets, such as cash and investment portfolios.

This shift may not only change the value of your estate for IHT purposes but also how accessible, taxable and sustainable your wealth is over time.

Moreover, you might decide to use the proceeds from your sale to improve your financial situation in the short to medium term, for example, by clearing your mortgage and other outstanding debts.

All of which could have implications for your estate plan. That’s why it’s crucial to review your position with your financial planner post-exit to ensure that your strategy remains relevant and in line with your goals.

2. Make strategic lifetime gifts

Gifting wealth during your lifetime could be a useful way to support your loved ones when they need it the most, while also reducing the value of your estate for IHT purposes.

Indeed, if you have children or grandchildren who are planning to buy their first home or start a family, they might benefit from receiving some of their inheritance sooner rather than later. You’ll also have the joy of seeing them enjoy the financial rewards you worked so hard to achieve with your business.

There are several gifting allowances and exemptions you could use each tax year to pass on your wealth without triggering an IHT charge. For example, the annual exemption allows you to gift up to £3,000 in the 2026/27 tax year free from IHT.

Larger gifts are normally treated as ‘potentially exempt transfers’, which usually fall outside of your estate if you survive for seven years after making them.

You might also want to consider donating to a charitable cause that matters to you. Not only would this allow you to leave a meaningful legacy and support important work, but it could also reduce the IHT burden on your beneficiaries. If you give at least 10% of your net estate to eligible causes, the IHT rate decreases from the standard 40% rate to 36%.

Your financial planner can talk you through all the IHT gifting allowances available and create a strategy tailored to your needs and wishes.

3. Consider setting up trusts

Trusts allow you to move wealth out of your taxable estate while retaining some control over how and when it’s distributed.

This may be especially useful post-exit if you want to reduce future IHT exposure without transferring assets to your beneficiaries outright.

This is a complex area of financial planning, and there are many types of trusts to consider. It’s important to ensure that the trust you choose aligns with the flexibility you need and your long-term goals.

Also, trusts are not always IHT-free; there could be entry, periodic and exit charges. For example, there may be an IHT charge of up to a maximum of 6% when you transfer assets out of a trust.

Your financial planner can explain your options and help you understand the tax implications of each one, allowing you to make an informed decision.

4. Invest in appropriate life insurance

You may not be able to completely avoid an IHT bill on your estate after selling your business. However, you could ease the financial burden and emotional stress of managing this charge on your beneficiaries by taking out life insurance to cover the cost.

Moreover, placing life insurance in a trust keeps the payout outside of your taxable estate. This generally means your loved ones will receive the full amount, without having to wait for the potentially lengthy probate process to complete.

Your financial planner can review your life insurance needs alongside your broader estate plan and assess whether this is a helpful approach for your circumstances and goals.

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 estate planning, tax planning, or trusts.

Note that life insurance and financial protection plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.

Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.