IHT Business Relief – how it works

It has always been important to regularly review your estate planning and current Will for tax efficiency and to ensure they align with any current wishes. With the proposed tax changes, safeguarding your estate from future tax liabilities has become even more critical.

Changes to the Inheritance Tax (IHT) relief available for assets qualifying for Business Relief (BR) and Agricultural Relief (AR) were announced in the 2024 Autumn Budget with the legislation finally introduced from 6 April 2026. Anti-forestalling provisions apply to lifetime transfers between 30 October 2024 and 5 April 2026.

 

If the worst was to happen tomorrow, do you know how much IHT would have to be paid on your business? 

Would the next generation be able to continue the business? 

Talk to our team to understand your position and get help to plan ahead for your family’s financial security. 

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What is Business Relief from Inheritance Tax?

BR is a valuable relief from IHT for business owners. Its purpose is to reduce IHT charges arising on the transfer of qualifying business interests during a person’s lifetime or on their death to allow the business to continue. It is vital to consider the availability of BR proactively in the context of a business owners’ succession or wider estate planning, for example, when the owner wishes to pass the business to the next generation or a family trust.
 

The rules from April 2026

From 6 April 2026, the first £2.5m of combined agricultural and business property will continue to receive 100% relief, with 50% relief on amounts over £2.5m. The qualifying conditions themselves (see below) have not changed.  

However, business relief for shares designated as unquoted (i.e. that are not listed on a recognised stock exchange, which includes AIM shares), has reduced from 100% to 50% and the £2.5m allowance does not apply to these shares. 

Assets that receive 50% relief are subject to an effective IHT rate of 20%, as opposed to the main rate of 40%. 

The £2.5m will effectively be a ‘lifetime allowance’, covering the estate on death, failed gifts and lifetime transfers into trust in the seven years before death. The £2.5m will be shared across assets qualifying for BR and AR on pro-rata basis. For spouses, any of the £2.5m nil band unused at death will be transferred to the surviving spouse (and it is not necessary for the deceased spouse to have owned qualifying assets).

For lifetime gifts, the allowance for individuals will refresh every seven years on a rolling basis in the same way the IHT nil rate band already applies to lifetime charges.  

The £2.5m allowance will be fixed at that level up to April 2031, in later years it will be indexed in line with CPI, and as with the other IHT nil rate bands.

The option to pay IHT by equal annual instalments over 10 years, interest-free, will continue to be available to qualifying agricultural and business property. 

These are seismic changes, and it is now more important than ever that business owners  start to consider their longer-term objectives and wishes now, so they are best equipped to plan under the new rules.
 

Transitional rules

An individual could have made a lifetime transfer, e.g. a transfer to a trust, before 6 April 2026 and qualified for 100% BR or AR on the lifetime transfer based on the old rules. However, for gifts made from 30 October 2024 onwards, if that individual dies after 5 April 2026 and their death is within 7 years of that transfer, any resulting IHT liability will be calculated by reference to the new rules. 
 

Trusts

Where a settlor has settled trusts before 30 October 2024 that contain BR or AR qualifying property on that date, each of those trusts will have its own £2.5m allowance – but anti-fragmentation rules will not allow this for trusts created by the same settlor from 30 October 2024 onwards, which will share a £2.5m ‘lifetime’ allowance. 

The way the new rules apply to business and agricultural property held in trusts follows established IHT principles, and there may still be good reasons to hold and/or transfer business assets into trust. However, in future, it is much more likely that some IHT will be payable at 10 year anniversaries and on trust distributions (albeit that payment by instalments over 10 years is an option).If you held business assets in trust before 6 April 2026, or are considering the sale of a business, you should seek specific advice on the ways these new rules will work as, Find out about  IHT planning options for business owners.

BR reduces the value of gifts of Relevant Business Property (RBP), made during lifetime or on death, for the purposes of calculating any IHT due on those gifts. The reduction in value will currently be either 100% or 50%, depending on the value of the asset, the type of asset and ownership.

In broad overview, the conditions for an asset to qualify as RBP are:

  1. The assets include a business (carried on by a sole trader or interest in a partnership), shares in an unquoted company or assets held personally used in a qualifying business. 
  2. Ownership throughout the two-year period leading up to the transfer.
  3. The business must be carried on with the intention of making a profit.
  4. There is not a binding contract for sale of the asset.
  5. Companies must not be in liquidation or winding up.
  6. The business must not consist “wholly or mainly” of dealing in shares, land or buildings or making or holding of investments.

All these tests need to be passed at the time of the gift (i.e. when a lifetime gift is made or on death) for the asset to qualify for relief.

It is common to refer to a qualifying business as ‘trading’ although the provisions are slightly nuanced in that any shareholding in an unlisted company can qualify for BR unless it undertakes a disqualifying activity (see 6 above). It is a different test compared to capital gains tax (CGT) Business Asset Disposal Relief or the corporation tax Substantial Shareholdings Exemption, but some principles are similar. 

Relief is available for a controlling interest in a quoted company, but such circumstances are rare. Shares listed on AIM are treated as unquoted for these purposes (but will receive less beneficial treatment than unquoted shares under the new rules).

Once you have confirmed that an asset is RBP, it is necessary to consider if there are any excepted assets within the business / company. 

The value of any excepted assets is left out of account for the purposes of BR (i.e. they remain chargeable to IHT). Excepted assets are any assets not used wholly or mainly for the purposes of the business and not required for future use in the business.

This would include assets held within a business / company for personal use (e.g. property investments) and could also include large cash balances where the cash is not required for current or future business purposes. 

If there are excepted assets within the business, BR can still be available, but it will be reduced proportionally so that no relief is given for the excepted assets. 

In some cases, a ‘hybrid’ trading and investment business may qualify in full for BR. 

Subsidiaries which themselves do not meet the qualifications for BR are also excluded from relief.

There is clawback of BR in certain circumstances, for example on lifetime gifts if the person dies within seven years and the recipient no longer owns the property or if the asset no longer qualifies as RBP.

If RBP is transferred from one spouse or civil partner to the other on death, the survivor is automatically credited with the ownership period of the deceased spouse or civil partner. 

There is also a relaxation of the two-year holding requirement when RBP is replaced by new property, which is also RBP, within five years.

It has always been possible to arrange life cover or to pay IHT by instalments as viable alternative options. However, from April 2026, IHT on business property may be paid over ten annual instalments, interest-free and so offers some measure of mitigation.

Key succession planning issues

It is important to remember that there is no single “right” plan for business succession. Business owners and their families will need to weigh tax outcomes against other considerations such as control, flexibility, family dynamics and the ability to adapt as the tax rules continue to evolve. 

Sound succession planning has never been a one-off exercise and the new BR/AR regime reinforces this. As your own and your family’s circumstances continue to change so your plans will need to change over time. Therefore, it is vital to understand: 

  • which planning decisions need to be taken early, 
  • which options can remain open, and 
  • where the family is prepared to accept some IHT risk as part of a long-term strategy.


For example, if lifetime gifting of assets is going to be part of your plan, starting those early is sensible. Equally, if you expect your business to grow over time, ensuring the value of that growth accrues outside your estate (ie in the hands of the next generation) is something to plan for soon. 

Sharing ownership of the business with your spouse and updating your will to allow for different succession options is a practical approach to building in flexibility for the future. 

Of course, your business assets are not the only assets that may be liable to IHT. New rules could trigger IHT on residual pension funds for deaths after 6 April 2027, and the impact on your investments and other assets also needs to be considered – see protecting your family's assets. 


For help and advice on Business Relief, Agricultural Relief or any IHT issue please get in touch with the team, who will be happy to discuss your situation.  

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