Smart inheritance tax planning for business owners

Inheritance Tax (IHT) is often overlooked until it becomes a pressing issue. For those with significant wealth, it can take a considerable portion of their estate when passed on to the next generation. With careful planning, this tax burden can be significantly reduced.

For many business owners, one of the most effective strategies is Business Relief (BR), a nuanced area of tax planning, but one that can deliver significant benefits if handled correctly.

In this article, David Hulse, Head of Hugh James Independent Financial Advisers team, explores how Business Relief works and how clients are using it as part of their wider estate strategies.

What is Business Relief and why does it matter?

Put simply, Business Relief allows certain business assets to be passed on free from IHT, provided they’ve been owned for at least two years. That can make a huge difference to the value of your estate passed on to the next generation.

It applies to unlisted trading companies, shares listed on the AIM market, and business assets actively used in trading. If you own a qualifying asset and meet the two-year threshold, it could be excluded entirely from your taxable estate.

This isn’t just tax-efficiency for the sake of it. It’s about protecting the value of businesses people have spent a lifetime building—and enabling them to pass that value on in full.

Case studies: fictional, but familiar

To make the potential of Business Relief more tangible, let me introduce a few fictional examples that reflect the kinds of conversations we often have with clients:

Late-stage planning that still works

Harold and Julia, both in their 90s, hadn’t had much opportunity for traditional IHT planning. However, by investing £500,000 in Business Relief-qualifying assets, they could shield this sum from IHT if either of them lives for another two years. It’s not too late to plan effectively—even in your later years.

Balancing flexibility with future planning

Carol, 55, is in good health and wants options. She’s not ready to give assets away entirely. Business Relief gives her the flexibility she needs, with assets that remain accessible yet protected from IHT after two years. It’s a strategic bridge between financial control and efficient legacy planning.

Combining Business Relief with trusts

Louise, 73, wanted to pass £600,000 to her children and grandchildren but was wary of losing control over the money. By placing BR-qualifying investments into a discretionary trust after two years, she keeps the funds within the family, protected from both tax and potential outside claims.

When companies hold too much cash

Take Andrew and his father, owners of a business valued at £10 million, including £3 million in cash reserves. HMRC might view half that cash as not qualifying for BR, resulting in an unexpected £600,000 IHT bill. By moving part of those funds into a BR-qualifying investment, they reduce exposure without compromising business liquidity.

Risks and considerations to think about: understanding the trade-offs

Every BR-qualifying investment carries risk – especially those tied to AIM shares or smaller companies. These can fluctuate more than mainstream investments. While some prefer the potential for higher returns, others lean toward lower-volatility options. The right route depends on your risk profile, goals, and the time you have.

Is Business Relief right for you?

Business relief is not a one-size-fits-all solution. Everyone’s situation is unique, and it’s essential to assess whether this strategy aligns with your financial goals and risk appetite. Consulting with a qualified advisor who specialises in IHT planning is key to understanding whether business relief is the right option for you.

When it comes to managing your estate and minimising IHT, Business relief is an invaluable tool that can help protect your wealth for future generations. By incorporating Business relief into your IHT strategy, you can reduce your tax liabilities while still maintaining access to your assets and ensuring they’re passed on to your loved ones.

If you’re considering business relief as part of your IHT strategy, it’s important to seek professional advice to ensure that this approach fits your personal financial situation. With the right planning, you can protect your wealth and avoid unnecessary IHT bills, providing more for your beneficiaries in the long run.

Taking control of your legacy

Business Relief offers a powerful, flexible solution for business owners looking to protect their legacy, but it’s not a “plug-and-play” fix. It demands foresight, timely action, and a clear understanding of the risks and opportunities involved. Now is the time to act. Whether you’re nearing retirement or just starting to consider your estate planning options, don’t leave your financial legacy to chance.

Consult with a qualified adviser who understands the intricacies of Business Relief and can help tailor a plan that’s right for your circumstances. Smart planning today means more control tomorrow, securing the future you’ve worked hard to build not just for yourself, but for your family. Your business has been your life’s work – make sure it becomes your legacy too.

Important note on legislative changes

This article is based on legislation and tax rules in place as of March 2025. The UK Government is currently reviewing aspects of IHT and BR, and we expect further announcements in upcoming budgets. We recommend regular reviews of your estate planning strategy to ensure it remains aligned with current law and your long-term objectives.