In the October 2024 Budget, the Government made reforms to Inheritance Tax (IHT) that will take effect from April 2026.
The changes will restrict the availability of Business Property Relief (BPR), which helps reduce the IHT liability for shareholders in family-owned businesses.
The new £1 million BPR cap
BPR currently gives up to 100 per cent relief on qualifying assets, allowing them to be passed on free of IHT if the right conditions are met.
However, from April 2026, the first £1 million of qualifying business assets will receive 100 per cent BPR. Any value above that figure will be eligible for 50 per cent relief.
The standard 40 per cent IHT rate will then apply, creating an effective 20 per cent IHT charge on a value above £1 million.
The cap will apply per individual and will not be transferable between spouses. Each trust will have its own £1 million limit. However, individuals cannot create several trusts to multiply the allowance.
Why family firms are at risk
A significant number of private sector businesses in the UK are family-run – estimated to be more than 5 million in total.
Many of them already exceed £1 million in value.
Previously, BPR has enabled family businesses to pass down wealth from generation to generation without triggering IHT liabilities.
However, the new rules could mean a substantial IHT bill if no planning takes place.
Steps to take before the IHT reform in 2026
Succession planning will be important for family-run businesses, even if owners do not intend to exit or retire soon.
Families should review ownership structures to see whether shares can be distributed among family members or held in trust.
Transfers before April 2026 may allow access to more than one, £1 million allowance. However, professional guidance is necessary to avoid unintended tax consequences.
A review of the company’s balance sheet can identify assets that do not qualify for relief and which could possibly be transferred. In addition, planning for liquidity helps ensure beneficiaries have funds available to pay any tax.
