Passing a family company to the next generation used to attract little or no inheritance tax. That is still possible, but only up to a ceiling, and the ceiling is lower than many owners assume. Inheritance tax planning for business owners now must account for a £2.5 million limit on full relief and, from April 2027, a pension pot that no longer sits outside the estate. The sections below show where the tax lands, using three worked cases, and what can be done about it. Our Accountant And Tax Specialist team in London can apply the same thinking to your own figures.
Where the £2.5 Million Line Sits
Every estate starts with a £325,000 nil-rate band per person. Add a further £175,000 if the family home goes to children or grandchildren, though that extra band shrinks once the estate passes £2 million. Whatever remains is taxed at 40%. None of these thresholds will rise before April 2031, so a growing business simply covers more taxable ground each year.
Business relief changes the sum for company assets. Until April 2026, a qualifying trading company could be left to heirs with no tax on its value at all. Today the full exemption applies to the first £2.5 million of qualifying business and farming assets owned by one person. Value beyond that is halved for tax purposes, which works out at an effective 20% charge on the excess. On £1 million above the line, the extra charge is £200,000 before any nil-rate band is applied.
The ceiling is a single pot. Farmland and a company count together, not separately. If one spouse or civil partner dies without using the pot, the survivor inherits the leftover, which lifts a couple’s combined protection towards £5 million. AIM-listed shares follow their own track and receive the 50% treatment regardless of value.
Timing matters too. A gift of business assets made since 30 October 2024 uses up part of the pot if the donor dies within seven years and on or after 6 April 2026.
Three Owners, Three Different Bills
The first owner holds a company worth £1.8 million and little else. Everything falls inside the
£2.5 million line, so the company adds nothing to the tax bill.
The second owner is single and holds a company worth £3.2 million, a house worth £750,000 and £250,000 in savings, all left to friends rather than children, so no residence band applies. The first £2.5 million of the company is fully relieved. The other £700,000 is halved, leaving
£350,000. Add the house and savings and the taxable total is £1,350,000. After the £325,000 nil-rate band, 40% applies to £1,025,000, which gives £410,000.
The third owner has identical assets, but a late spouse left everything to them and used no allowances. The survivor now has a £5 million business pot and £650,000 of nil-rate band. The company is fully relieved. The house and savings total £1,000,000, so 40% applies to £350,000 and the bill drops to £140,000.
Same assets, a gap of £270,000. Marital history, wills and timing explain the difference, which is why the structure of ownership deserves as much attention as the valuation. These cases are illustrations that ignore other reliefs and exemptions.
Does Your Business Qualify for Relief?
Relief is earned, not assumed. HMRC looks at how long you have held the business, what it does and what sits inside it.
Ownership must usually have run for two years before the death or gift. The business must be primarily trading, which excludes most property letting and investment holdings. Mixed businesses are judged as a whole, so heavy investment activity can sink the claim. The GOV.UK guidance on Business Relief lists the tests.
Assets you own personally but lend to your own company, such as the premises or heavy machinery, sit lower down the ladder and normally earn 50% instead of full relief. Cash and investments that the company does not need for its trade can be stripped out of the claim altogether.
Sole traders and partners claim on the business itself. Company owners claim on their shares. Landlords with several properties should not assume either route fits, and our property tax specialist page covers how different rules can apply.
The Pension Pot Joins the Estate in April 2027
Until now, a director who left a pension untouched could pass it to the family outside the estate for inheritance tax. For deaths on or after 6 April 2027, that stops for most unused pension funds and death benefits. Cover that pays out because an employee dies in service stays outside the change, and so do pensions paid to dependants.
Go back to the second owner above and add a £600,000 pension. Because the nil-rate band is already used up, the whole £600,000 is taxed at 40%, which adds £240,000 and lifts the bill to £650,000.
The executors, not the pension company, carry the duty to report and pay. They may instruct the provider to hold back half of the taxable benefits for as long as 15 months and settle HMRC from that fund before the balance goes to beneficiaries. HMRC’s policy paper on unused pension funds describes the mechanism.
Anyone who has deliberately avoided drawing a pension should rethink that approach. Withdrawals are taxed as income, so the right answer depends on age, other earnings and family plans. Our Pension Advisory Service page explains the support on offer, and a regulated financial adviser should confirm any change in how benefits are drawn.
Inheritance Tax Planning for Business Owners: Ways to Trim the Bill
Gifts do most of the work. Each tax year allows £3,000 to go to anyone free of tax, plus £250 each to as many people as you like. Larger gifts to individuals drop out of the estate if you live another seven years, and the tax on gifts above the nil-rate band tapers when death falls in years three to seven. Gifts made routinely out of surplus income, without denting your lifestyle, can also be exempt, provided you keep records.
Company shares need care. A share gift hands over votes and dividends, and it can trigger capital gains tax, so the two taxes need to be modelled together.
Spouses and civil partners can leave assets to each other free of inheritance tax, and unused allowances can follow. A solicitor-drafted will should be checked against the new limits, since poor wording can waste an allowance.
Leaving at least a tenth of your net estate to charity cuts the rate on the taxed balance from 40% to 36%. A life policy written in trust can place a lump sum outside the estate to fund the bill, subject to advice from a financial adviser.
Where tax relates to qualifying business property, the family can generally spread payment over ten annual instalments without interest. Other assets are due at the close of the sixth month after the month of death. A death in March, for example, means payment by 30 September.
Why the Quality of Your Accounts Matters
Executors have to prove a relief claim, and proof comes from paperwork: filed accounts, ownership records and a defensible valuation. A routine financial services audit or independent accounts review shows what the company owns, how it earns and whether it still looks like a trading business.
Brayan & Spencer Associates is registered as auditors in the UK by the Association of Chartered Certified Accountants. If you are searching for a registered auditor near me, our Audit Assurance & Services page explains how we can help.
Advice From Accountants and Tax Advisers in London
Estate planning pulls together accounts, tax and family decisions. Our Tax Advisers in London can test your relief eligibility and map your exposure, while our Accounting Services in London keep the figures behind your valuations current. When comparing Accountants and Tax Advisers in London, ask how they will coordinate with your solicitor and financial adviser.
Anyone seeking tax advice in London can also read our HMRC tax guide for London businesses for wider compliance.
Book an Inheritance Tax Review
The pension change takes effect on 6 April 2027, which leaves limited time to plan. Brayan & Spencer Associates can review how the 2026 and 2027 changes affect your company, premises and pension, and set out a practical plan. Book a free consultation through www.bsassociate.co.uk or call 0207 183 5956 today.
Inheritance Tax Planning for Business Owners: FAQs
No. It continues, but since 6 April 2026 the full exemption stops at £2.5 million of combined business and farming assets, with half relief above that.
Generally two years, and the business must be mainly trading rather than investing.
£325,000 each, plus up to £175,000 for a home left to children or grandchildren. Couples can usually combine these amounts, reaching up to £1 million.
Yes. Gifts to individuals leave the estate if you survive seven years, and taper relief can soften the tax on gifts made three to seven years before death. More answers are on our FAQ page.
