Unlocking Inheritance Tax Business Relief: Expert Guide for UK Business Owners

Running a business takes vision, hard work, and no small amount of sacrifice. But while you’re busy building your business for today, have you stopped to think about what happens when you’re no longer here to run it?

Inheritance Tax (IHT) planning for business owners isn’t just a financial task — it’s a vital part of protecting everything you’ve worked so hard to build and managing your income tax and estate obligations. Without a clear plan, your business could be exposed to inheritance tax, legal disputes, and unnecessary disruption for your loved ones.

At Toucan Law, we work with business owners across Weston-super-Mare, North Somerset, and beyond to ensure their business legacy is preserved and passed on the right way.

💴 What Is Inheritance Tax and How Does It Affect Business Owners?

Inheritance Tax is a tax on the estate (everything you own) of someone who has passed away. In the UK, IHT is currently charged at 40% on estates above the £325,000 Nil Rate Band (NRB). This threshold can be increased if you’re passing on a family home to direct descendants through the Residence Nil Rate Band, currently up to £175,000.

Many people assume their business is separate from their personal estate — but that’s not the case.

🔎 Why Business Owners Should Care:

If your business is part of your estate and you haven’t planned properly, its value could push the total value of your estate above the IHT threshold. This can leave your family facing a sizable IHT bill or, in a worst-case scenario, force them to sell parts of the business to cover tax liabilities.

🏢 Inheritance Tax Business Relief: A Powerful But Often Misunderstood Tool

Fortunately, UK tax law offers something called Inheritance Tax Business Relief (formerly Business Property Relief). This can reduce the taxable value of your business assets by up to 100%, including Agricultural Property Relief in some cases, especially following changes highlighted in the recent Autumn Budget.

📈 You may be eligible for Business Relief if:

• You own a trading business or an interest in one

• You hold shares in an unlisted company, such as AIM-listed shares

• You have business assets, such as land, buildings, or machinery used in your business operations

  
  

Relief can apply at either 50% or 100%, depending on how assets are held and used.

❌ But there are catches:

• Assets must usually be held for at least two years before death.

• Investment-focused businesses (e.g. property letting or share portfolios) often do not qualify.

  
  

⚠️Common IHT Planning Mistakes Made by Business Owners

Even the most astute entrepreneurs can fall into traps when it comes to IHT and estate planning. Here are the most common pitfalls:

❌ Not having a valid Will

Without a Will, your estate is divided under intestacy rules, which often do not reflect the needs of business owners or their families.

❌ Assuming automatic qualification for Business Relief

Not all businesses qualify. It's vital to understand whether your company meets the trading requirements.

❌ Holding shares personally

Owning shares personally rather than via a Trust can expose your estate to higher IHT.

❌ No Business Lasting Power of Attorney (LPA)

If you lose mental capacity and there is no LPA in place, your business operations may be paralysed.

❌ Waiting until retirement to plan

To qualify for Business Relief, assets must be held for at least two years. Leaving planning too late can cost your family dearly.

👥 It’s Not Just About Tax — It’s About Your Family’s Future

Estate planning ensures your business supports the people who matter to you, not HMRC.

Without proper planning:

• Families face delays and legal complications

• IHT bills can force business asset sales

• The business may be wound up or become the subject of dispute

With the right plan:

• Your heirs receive maximum benefit

• The business can continue, sell, or restructure tax efficiently

• You retain control of the legacy you've built

  
  

💼 Inheritance Tax Planning After the 2026 Changes

From 6 April 2026, key changes to Business Relief will come into effect. These changes will dramatically reshape the tax landscape for business owners:

⚠️ What’s Changing:

• 100% Business Relief will be capped at £1 million

• Amounts above this cap will receive only 50% relief

• AIM-listed and EIS shares drop from 100% to 50% relief

• Land, machinery, and property still receive 50% relief but won't affect the £1 million cap

• Unused caps are not transferable between spouses or civil partners

  
  

📊 Example: Before vs After 6 April 2026

Estate includes:

• £3 million in unlisted company shares

• £500,000 in land and machinery

Before 6 April 2026:

• £3 million = 100% relief = £0 tax

• £500,000 = 50% relief = £100,000 tax

• Effective IHT Rate: 2.86%

After 6 April 2026:

• £1 million = 100% relief

• £2 million = 50% relief = £400,000 tax

• £500,000 = 50% relief = £100,000 tax

• Total IHT: £500,000 – Effective Rate: 14.29%

  
  

🔢 Strategic Estate Planning Tips for Business Owners

✅ 1. Update or Create a Business-Focused Will

Make sure your Will clearly sets out who inherits your business and how control should pass.

✅ 2. Use Trusts for Long-Term Flexibility

Discretionary and Interest in Possession Trusts can preserve reliefs and protect your assets from external risks.

✅ 3. Put a Business Lasting Power of Attorney in Place

Ensure business continuity if you lose mental capacity.

✅ 4. Review Your Shareholding and Legal Structures

Consider holding shares in family investment companies or Trusts to optimise tax efficiency.

✅ 5. Consider Whole of Life Insurance

This can cover future IHT liabilities and avoid forced business sales. Especially useful alongside gifting strategies and lifetime transfers.

✅ 6. Collaborate With Your Financial Team

Toucan Law works alongside accountants, IFAs, and tax planners to build holistic strategies.

🚪 Lifetime Gifting and the 7-Year Rule

From 30 October 2024, any gifts of qualifying assets made during life will be counted towards the new £1 million cap if the donor dies on or after 6 April 2026. This makes whole of life insurance even more important to ensure liquidity for any potential tax liabilities.

📅 Why Now Is the Time to Act

The upcoming changes affect both lifetime and death transfers, meaning your business could be vulnerable sooner than you think.

Waiting could cost your heirs dearly — in both stress and financial burden. Acting now gives you options, flexibility, and peace of mind.

📢Inheritance Tax Planning with Toucan Law

At Toucan Law, we help business owners:

• Create or update business Wills

• Set up appropriate Trusts

• Coordinate with accountants and advisers

• Plan lifetime gifting strategies

• Understand how to apply Business Relief after 2026

We offer:

• ✅ Personal, jargon-free advice

• ✅ Local expertise in Weston-super-Mare & North Somerset

• ✅ Clear fixed fees

📞 Ready to Protect Your Business Legacy? Let’s Talk.

Your business is your life’s work. Let’s make sure it stays that way.

📞 Call: 01934 271027🌐 Visit: www.toucanlaw.co.uk📅 Book a FREE consultation today.