Preserving family businesses under the new inheritance tax framework

The changes to business and agricultural relief, originally announced in the Autumn 2024 Budget, have caused some business owners and farmers to make lifetime gifts of qualifying assets before the new rules take full effect from 6 April 2026.

From 6 April 2026, 100% business relief and/or agricultural relief is limited to £2.5 million of qualifying assets with 50% relief applying to any excess. Any unused 100% allowance on an individual’s death can be transferred to a surviving spouse or civil partner. For these purposes, the unused allowance is determined by taking account of transfers on the individual’s death and any chargeable lifetime transfers (CLTs) and (failed) potentially exempt transfers (PETs) made in the 7 years before death.

Lifetime gifts: what you need to know

Owners of high value businesses may now need to consider whether to transfer shares to, say, family members during their lifetimes, on death or a combination. The inheritance tax position on a gift of qualifying business and/or agricultural assets is now as follows:

• For gifts of qualifying assets made before 6 April 2026, whether PETs or CLTs, no inheritance tax is paid at the date of the gift;
• For gifts made after 5 April 2026, no inheritance tax is payable at the time of the gift if it is a PET (irrespective of value) or a CLT which, when added to other CLTs made in the previous seven years, does not exceed £2.5 million;
• If the donor dies within 7 years and the gift, when made, exceeded the £2.5 million 100% allowance, an inheritance tax charge can arise. The tax charge is reduced by tapering relief if death occurs more than 3 years after the gift; and
• If the gift is a CLT to a discretionary trust, when calculating the periodic charge at the 10-year anniversary, the trustees are entitled to a 100% allowance equal to the lower of £2.5 million and the value of the property originally gifted to the trust. Any value above that figure (after deduction of the trustees’ 100% allowance) will qualify for 50% relief and so effectively be taxed at 3%. The 100% allowance available to a trust is diluted by the number of trusts created by the same settlor since 30 October 2024. No 100% allowance is available when calculating the rate of tax for an exit charge but the value of chargeable property will, at that time, be reduced by any business or agricultural relief.

Planning for high-value businesses

Advisers will need to take these changes into account when determining the level of life cover needed to provide for the potential inheritance tax arising on a lifetime gift of qualifying assets.

Case study: Ted’s succession plan

Ted is aged 62 and is divorced. He owns 100% of the shares in a successful paving company worth £4 million. He thinks that now is a good time to transfer control of the business to his 2 sons, who are both heavily involved in the business.

If Ted died after 5 April 2026, the inheritance tax on his shares would be up to £300,000 (£1.5 million x 50% x 40%). Whilst this could be paid in 10 annual interest-free instalments, this would put the business cashflow under intense pressure. He feels that now is a good time to start making gifts to his sons, particularly as his £2.5 million 100% business relief allowance will become re-available if he survives the gifts by 7 years.

Ted gifts £1.25 million of his shares to each of his two sons. These are PETs so, on his survival for 7 years, they fall outside of his taxable estate. If he dies within 7 years, the whole of the then failed PETs would be covered by his £2.5 million 100% business relief allowance, assuming the shares are still owned by his sons (or they've used replacement relief). By claiming CGT holdover relief under s165 TCG Act 1992, any CGT on the shares is deferred until a later disposal by his sons.

Ted survives for 7 years and the value of his remaining shareholding has then grown to £2.5 million. At this point, his 100% allowance renews so he can make further gifts of shares worth up to £2.5 million (with an appropriate CGT hold-over claim) safe in the knowledge that he has transferred the whole business to his sons with no inheritance tax.

Had Ted wanted to keep some voting control over the gifted shares, he could have made the gifts to a discretionary trust, rather than his sons, under which he was a trustee (but not a beneficiary). The gifts would be CLTs but would not give rise to any immediate inheritance tax both when made or if Ted died within 7 years of a gift, assuming the gifted shares were still owned by the trustees (or they've used replacement relief). The trustees would be entitled to a £2.5 million 100% allowance (and a nil rate band of, normally, £325,000) and so, at a 10-year anniversary, the trustees are only liable to inheritance tax to the extent that the value of the trust exceeded £2,825,000 – and then only at 3%. This £2.5 million 100% entitlement renews after 10 years.

Working together for effective succession planning

While we are ‘tax aware’ as planners, complex situations like these benefit from collaboration with tax and legal advisers. Each professional adds a unique perspective, and together they create a strong team capable of delivering the best outcomes for clients and their families.

If you, or someone you know, would like guidance on succession planning or inheritance tax matters, contact us to arrange a free initial consultation.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions. The information in the article is based on current laws and regulations which are subject to change as at future legislations. 

The information in this article is correct as at 18/02/2026.

The Financial Conduct Authority does not regulate tax advice, trusts or estate planning.