For decades, a qualifying trading business could pass to the next generation free of inheritance tax. That is no longer reliably true — and the tax now has to be funded from somewhere.
For as long as most business owners have been in business, the position has been simple: build a qualifying trading company, and it could pass to your children free of inheritance tax. Business Relief made succession possible. It is the reason family firms exist across generations rather than being sold to pay a tax bill.
That assumption no longer holds — and a great many owners have not yet registered it.
What has changed?
Reforms taking effect from April 2026 restrict Business Relief and Agricultural Relief.
Where those reliefs previously removed qualifying business and agricultural assets from inheritance tax entirely, assets above a cap now attract only partial relief.
The practical effect is straightforward and uncomfortable: an estate containing a substantial trading business or farm, which would previously have passed on with no inheritance tax at all, may now carry a real liability.
*(The precise cap and the rate of relief above it are confirmed with clients on a case-by-case basis — this is an area where the detail matters enormously and general guidance is dangerous.)*
Why this is worse than it first appears
Inheritance tax on a cash estate is unwelcome but manageable — there is money there to pay it.
Inheritance tax on a business is a different problem entirely. The value is real, but it is illiquid. It is in plant, in stock, in goodwill, in land. It cannot be handed to HMRC.
So the tax has to be funded — and the sources are limited:
- Extract cash from the business, which weakens it at precisely the moment it is changing hands.
- Borrow against it, loading debt onto a business that has just lost its founder.
- Sell part of it — or all of it — which defeats the entire purpose of the succession.
That is the scenario the reform creates: families forced to sell part of the very business the plan was meant to preserve.
What can be done?
A good deal — but almost all of it takes time, which is why this is urgent rather than merely important.
Lifetime gifting. Outright gifts generally leave your estate after seven years. That clock only runs if you start it.
Trusts. Can remove value from the estate while retaining a degree of control, though they carry their own charges and must be structured with care.
Structure. Whether assets qualify for relief at all depends on how the business is held and what it does. Excepted assets, investment activity within a trading company, and how property is held can all reduce or destroy relief. A structural review is now the highest-value piece of work most business owners can commission.
Funding the liability. Life cover written in trust does not reduce the tax, but it pays it — meaning the family keeps the business. For many owners this is the simplest and most effective single step.
Your will. How the business passes, and to whom, determines whether reliefs and spousal exemptions apply at all.
Who should act now?
Anyone who intends to pass a trading business or farmland to their family. If that is your plan, the plan needs revisiting. It may still work. It may need restructuring. It may need funding. But it should not be left to be discovered by your executors.
Anyone who has ‘done their IHT planning’ and filed it away. Planning built on the assumption of full Business Relief may now be wrong — and confidently, expensively wrong.
Anyone approaching retirement with the business as their main asset. The interaction between succession, exit and inheritance tax has changed, and the right answer may no longer be the one you chose five years ago.
The seven-year clock does not start until you start it.
Frequently asked questions
Will my family still inherit my business free of inheritance tax?
Not necessarily. Reforms from April 2026 restrict Business Relief and Agricultural Relief, so business and agricultural assets above a cap attract only partial relief rather than full exemption. An estate that would previously have passed a company on free of IHT may now face a liability that has to be funded.
Why is inheritance tax on a business worse than on cash?
Because the value is illiquid. A business cannot be handed to HMRC. The tax must be funded by extracting cash from the company, borrowing against it, or selling part of it — each of which weakens or destroys the very business the succession was meant to preserve.
How does the seven-year rule help?
An outright lifetime gift generally falls out of your estate entirely if you survive seven years, with taper relief reducing the charge on gifts made more than three years before death. The clock only runs from the date of the gift — which is why starting early matters far more than planning perfectly.
Can life insurance solve this?
It does not reduce the tax, but it can fund it. A policy written in trust pays out outside the estate, giving the family the cash to settle the inheritance tax without selling or stripping the business. For many owners it is the simplest single step, and it works best alongside — not instead of — structural planning.