Inheritance Tax On A Family Business
- MAZ
- Aug 9
- 19 min read
Updated: Sep 11
The Audio Summary of the Key Points of the Article:
Understanding Inheritance Tax on Your Family Business The Basics You Need to Know
Picture this: you’ve poured years into building your family business, whether it’s a corner shop in Leeds or a manufacturing firm in Birmingham. Now, you’re wondering what happens when you pass it on. Will your loved ones face a hefty inheritance tax (IHT) bill? In my 15 years as a chartered accountant advising UK business owners, I’ve seen this question spark both worry and opportunity. Let’s break down the essentials of IHT on family businesses for the 2025/26 tax year, with practical steps to verify your position and avoid surprises.
What Is Inheritance Tax, and Why Does It Matter for Your Business?
Inheritance tax is a levy on the estate—property, money, and possessions—of someone who’s passed away, charged at 40% on anything above the tax-free threshold, or 36% if you leave at least 10% to charity. For the 2025/26 tax year, every individual gets a nil rate band (NRB) of £325,000, unchanged since 2009, meaning no IHT applies below this amount. If you’re passing your family home to direct descendants (children or grandchildren), you might also qualify for the residence nil rate band (RNRB) of £175,000, boosting your tax-free allowance to £500,000. Couples can combine these, potentially shielding up to £1 million if unused allowances are transferred to a surviving spouse or civil partner.
For family businesses, IHT can hit hard because your business’s value—premises, stock, goodwill—counts towards your estate. Without planning, your heirs might face a tax bill they can’t pay without selling assets. But here’s the good news: Business Property Relief (BPR) can slash your IHT bill, often to zero, if your business qualifies. Let’s explore how this works and how to check your liability.
How Does IHT Apply to Family Businesses?
Let’s say you own a family bakery worth £600,000. Without reliefs, IHT would apply to £275,000 (£600,000 minus £325,000 NRB) at 40%, equating to £110,000 in tax. Ouch. But BPR can reduce or eliminate this if your business meets HMRC’s criteria. BPR offers 100% relief on:
● Shares in an unlisted company (like most family businesses).
● A sole trader business or partnership share.
● Assets used in the business, like premises or machinery, if held for at least two years.
However, BPR doesn’t apply to businesses primarily dealing in investments (e.g., property letting) or those with significant cash reserves not used for trading. I’ve seen clients tripped up here—take John from Bristol, whose property management firm was deemed an “investment business” by HMRC, losing BPR eligibility. To avoid this, ensure your business is actively trading, not just holding assets.
Table 1: Key IHT Thresholds and Rates for 2025/26
Allowance/Rate | Amount | Details |
Nil Rate Band (NRB) | £325,000 | Tax-free allowance for all estates. Transferable to spouse/civil partner. |
Residence Nil Rate Band (RNRB) | £175,000 | Additional allowance if passing main home to direct descendants. Frozen until 2030. |
Standard IHT Rate | 40% | Applies to estate value above NRB/RNRB. |
Charitable Rate | 36% | If 10%+ of net estate is left to charity. |
Business Property Relief | 100% or 50% | 100% for trading businesses/shares; 50% for certain assets like land used in business. |
Source: HMRC IHT thresholds
Step-by-Step: How to Verify Your IHT Position
None of us loves tax surprises, but here’s how to check if your family business will trigger IHT. Follow these steps to get a clear picture:
Value Your Estate: Add up all assets—business value, property, savings, investments—minus debts like mortgages or business loans. For businesses, get a professional valuation (e.g., from an accountant or valuer) to avoid HMRC disputes. Keep records, as HMRC can request them up to 20 years later.
Check BPR Eligibility: Confirm your business qualifies as a trading entity. Review your operations—does it generate income through active trading, or is it mainly holding investments? Consult HMRC’s IHT manual or an accountant.
Apply Allowances: Subtract your NRB (£325,000) and, if applicable, RNRB (£175,000) from your estate’s value. If you’re married, factor in your spouse’s allowances.
Calculate Potential Tax: For any value above the allowances, apply the 40% rate (or 36% with charitable donations). Use HMRC’s IHT calculator for a quick estimate.
Consider Lifetime Gifts: Gifts made within seven years of death may count towards your estate, with taper relief reducing the tax rate over time. Document all gifts to track potential IHT.
Case Study: Sarah’s Café in Manchester
Sarah, 62, owns a café valued at £450,000, with £50,000 in savings and a £200,000 home. Her total estate is £700,000. She plans to pass it to her son, Tom. Without BPR, her IHT calculation is:
● Estate: £700,000
● NRB: £325,000
● RNRB: £175,000 (home to son)
● Taxable: £700,000 - £500,000 = £200,000
● IHT: £200,000 × 40% = £80,000
But the café qualifies for 100% BPR, reducing its value to £0 for IHT. Her new calculation:
● Estate: £700,000 - £450,000 (BPR) = £250,000
● NRB: £325,000
● Taxable: £0 (below NRB)
● IHT: £0
Sarah’s proactive valuation and BPR check saved Tom £80,000. This is why verifying your position early is crucial.
Common Pitfalls to Watch Out For
Be careful here, because I’ve seen clients trip up when they assume BPR applies automatically. Common mistakes include:
● Misclassifying the Business: If your business holds excess cash or investments, HMRC may deny BPR. Regularly review your balance sheet.
● Undervaluing Assets: Lowballing your business’s value can lead to HMRC penalties. Use a professional valuer for accuracy.
● Ignoring Lifetime Gifts: Gifts to family within seven years can trigger IHT if you die within that period. Keep detailed records.
Worksheet: Quick IHT Estimator for Your Business
Use this to estimate your IHT exposure. Fill in your details:
● Business Value: £____ (Get a professional valuation)
● Other Assets (home, savings, etc.): £____
● Debts (mortgages, loans): £____
● Total Estate: £____ (Assets minus debts)
● BPR-Eligible Assets: £____ (Confirm with accountant)
● Net Estate for IHT: £____ (Total minus BPR)
● NRB (£325,000): £____
● RNRB (£175,000, if applicable): £____
● Taxable Amount: £____ (Net estate minus allowances)
● IHT at 40%: £____
This worksheet helps you visualise your liability and spot planning opportunities. Share it with your accountant for precision.
Regional Variations: Scotland and Wales
So, the big question on your mind might be: does where you live in the UK change your IHT? The short answer is no—IHT is a UK-wide tax, not devolved, so the same thresholds and rates apply whether you’re in Scotland, Wales, or England. However, income tax variations (e.g., Scotland’s higher rates—21% starter, 41% higher) can affect your estate planning, as they impact your cash flow for gifting or trust contributions. If you’re a Scottish taxpayer (prefix S on your tax code), check your personal tax account to confirm your income tax liability, as it may influence your ability to fund IHT mitigation strategies.
Family Business Inheritance Tax Tracker - UK Historical Data & 2026 Changes
Practical Steps to Minimise IHT on Your Family Business and Verify Your Position
So, you’ve got a handle on how inheritance tax (IHT) works for your family business, but now you’re wondering: how do I keep that tax bill as low as possible? In my years advising clients across London and beyond, I’ve seen business owners turn potential IHT headaches into manageable plans with a bit of foresight. This part dives into actionable strategies to reduce IHT, verify your tax position, and navigate complex scenarios like trusts or multiple income sources. Let’s roll up our sleeves and get practical for the 2025/26 tax year.
How Can You Reduce IHT on Your Family Business?
Nobody wants their family to sell the business just to pay a tax bill. Fortunately, there are ways to shrink your IHT liability, often dramatically, using reliefs and planning. Here’s how to approach it:
Maximise Business Property Relief (BPR)
BPR is your biggest ally, potentially wiping out IHT on your business’s value. To ensure eligibility:
● Confirm Trading Status: Your business must be actively trading, not just holding investments. For example, a family-run construction firm qualifies, but a company renting out commercial properties might not. I once helped a client in Sheffield restructure their property-heavy business to include active management services, securing BPR.
● Hold Assets for Two Years: BPR applies only to assets owned for at least two years. If you’ve recently acquired new premises or shares, track their timeline.
● Document Everything: Keep clear records of business activities, as HMRC may scrutinise claims. A solid paper trail saved one of my clients from a lengthy dispute.
Use Lifetime Gifts Strategically
Gifting parts of your business during your lifetime can reduce your estate’s value for IHT. Gifts are potentially exempt transfers (PETs), meaning they’re IHT-free if you survive seven years. Taper relief reduces the tax rate if you die within that period:
● Years 3–4: 32%
● Years 4–5: 24%
● Years 5–6: 16%
● Years 6–7: 8%
For example, gifting 25% of your business to your children now could remove that portion from your estate. But be cautious—retaining control (e.g., staying as director) can complicate things. Consult an accountant to avoid HMRC challenges.
Set Up a Trust
Trusts can protect your business while reducing IHT. By transferring shares or assets into a trust, they leave your estate, potentially escaping IHT. However, trusts are complex:
● Discretionary Trusts: You control how assets are distributed but may face immediate IHT at 20% on transfers above the £325,000 nil rate band.
● Business Trusts: These can qualify for BPR, meaning no upfront IHT if structured correctly.
I’ve seen trusts work wonders for clients like Emma, a Nottingham retailer who placed her shop’s shares into a trust for her daughters, preserving BPR and avoiding IHT. Speak to a trust specialist to tailor this to your needs.
Table 2: IHT Mitigation Strategies for Family Businesses
Strategy | How It Works | Key Considerations |
Business Property Relief | Reduces taxable value by 100% or 50% for qualifying businesses/assets. | Ensure business is trading, not investment-focused. |
Lifetime Gifts (PETs) | Removes gifted assets from estate if you survive 7 years. | Document gifts; avoid retaining control. |
Trusts | Transfers assets out of estate, potentially with BPR. | Complex; may incur upfront IHT or legal costs. |
Annual Exemption | Gift £3,000 per year IHT-free. | Can be carried forward one year if unused. |
Spousal Exemption | Transfers to spouse/civil partner are IHT-free. | Plan for second death to use both allowances. |
Source: HMRC IHT guidance
Step-by-Step Guide: Valuing Your Business for IHT
Valuing your family business accurately is critical to avoid HMRC disputes. Here’s a practical guide:
Gather Financial Data: Collect balance sheets, profit/loss statements, and cash flow records for the last 3–5 years.
Hire a Professional Valuer: A chartered accountant or business valuer can assess your business’s market value, considering assets, goodwill, and revenue. Expect costs of £2,000–£10,000, depending on complexity.
Apply BPR: If eligible, deduct the business’s value (or portion) from your estate calculation.
Submit to HMRC: Use form IHT400 when reporting the estate. Include valuation evidence to support your claim.
Check HMRC’s Response: HMRC may query valuations, especially for unlisted businesses. Respond promptly with documentation.
Case Study: Raj’s Tech Startup
Raj, 55, owns a tech consultancy in Cambridge valued at £800,000, with £150,000 in savings and a £400,000 home. He wants to pass it to his son, Anil. His valuation process:
● Valuation: A professional valuer confirms £800,000, supported by revenue records.
● BPR Check: The business is 100% BPR-eligible as a trading entity.
● Estate Calculation: £800,000 (business, BPR-exempt) + £150,000 + £400,000 = £550,000.
● Allowances: NRB (£325,000) + RNRB (£175,000) = £500,000.
● Taxable: £550,000 - £500,000 = £50,000.
● IHT: £50,000 × 40% = £20,000.
By gifting £100,000 of shares to Anil now as a PET, Raj could reduce his estate further, potentially eliminating IHT if he survives seven years.
Handling Complex Scenarios
Now, let’s think about your situation—if you’ve got multiple income sources or a unique setup, IHT can get tricky. Here are common scenarios I’ve seen:
● Multiple Income Sources: If you’re self-employed with a side hustle (e.g., Uber driving), ensure all income is reported via Self Assessment to avoid HMRC penalties affecting your estate. Use your personal tax account to verify.
● Partnerships: Only your share of the partnership qualifies for BPR. Document your ownership percentage clearly.
● Gig Economy: If your business involves gig work (e.g., freelance consulting), HMRC may scrutinise whether it’s a “business” for BPR. Keep detailed records of contracts and income.
● Scottish Taxpayers: While IHT is UK-wide, Scotland’s income tax bands (e.g., 42% top rate in 2025/26) reduce disposable income for gifting. Factor this into planning.
Checklist: Protecting Your Business from IHT
Use this to stay on track:
● Get a professional business valuation every 3–5 years.
● Confirm BPR eligibility with an accountant.
● Document all lifetime gifts with dates and values.
● Explore trusts for complex estates.
● Update your will to reflect IHT planning.
● Check your personal tax account for income tax accuracy, as it impacts planning funds.
Rare Cases to Watch For
Be careful here, because I’ve seen clients caught out by unusual scenarios:
● Chargeable Lifetime Transfers (CLTs): If you transfer assets into a trust above the NRB, you may face immediate IHT at 20%. For example, a £500,000 transfer incurs £35,000 tax (£500,000 - £325,000 × 20%).
● Emergency Tax Codes: If you’re overtaxed via PAYE (e.g., code 1257L not reflecting allowances), reclaim overpayments to boost funds for gifting. Check your payslip or P60.
● High-Income Child Benefit Charge: If your income exceeds £50,000, this charge reduces disposable income, limiting IHT planning. Adjust your strategy accordingly.
UK IHT Calculator: Property, Business & Estate Tax Planning Tool
Advanced IHT Planning and Real-World Applications for Your Family Business
Right, so you’ve grasped the basics of inheritance tax (IHT) and explored ways to cut your liability. Now, let’s get into the nitty-gritty—advanced strategies, real-world pitfalls, and how to apply this to your unique situation as a UK business owner in the 2025/26 tax year. In my 15 years advising clients from Cardiff to Glasgow, I’ve seen proper planning save families millions, but I’ve also seen sloppy mistakes cost dearly. Let’s dive into tailored advice, from complex business structures to handling HMRC scrutiny, with tools to keep you on track.
How Do You Plan for IHT with Complex Business Structures?
If your family business isn’t a straightforward sole trader setup—maybe it’s a limited company, partnership, or involves multiple generations—it’s a bit of a minefield. Here’s how to navigate:
Limited Companies and Share Transfers
For limited companies, IHT hinges on share ownership. Unlisted company shares typically qualify for 100% Business Property Relief (BPR), but only if the company is trading. If you hold shares personally, their value counts towards your estate. To reduce IHT:
● Gift Shares Early: Transferring shares to family members as potentially exempt transfers (PETs) can remove their value from your estate if you survive seven years. For example, gifting 20% of shares worth £200,000 now could save £80,000 in IHT (40% of £200,000).
● Use a Family Investment Company (FIC): An FIC lets you retain control while passing value to heirs. Shares in the FIC can qualify for BPR, and dividends can provide income without triggering IHT. I helped a client in Leeds set up an FIC for their manufacturing firm, saving £300,000 in potential IHT.
Partnerships and Sole Traders
For partnerships, only your share of the business qualifies for BPR. Sole traders get BPR on business assets (e.g., equipment, premises) but not personal assets. Document your ownership clearly—vague partnership agreements have led to HMRC disputes in my experience. For sole traders, consider incorporating to a limited company for easier share transfers, but weigh up costs like capital gains tax.
Multi-Generational Businesses
If your kids or grandkids work in the business, involve them early. Transferring shares or assets while you’re alive reduces your estate’s value. But watch out: if you retain significant control (e.g., as a director), HMRC might argue the gift has “reservation of benefit,” pulling it back into your estate. A client in Birmingham avoided this by stepping back from daily operations after gifting shares, securing IHT savings.
Table 3: IHT Considerations by Business Structure
Structure | BPR Eligibility | Planning Tips |
Sole Trader | 100% on business assets (e.g., premises, stock). | Consider incorporating for easier transfers. |
Partnership | 100% on your share of trading business. | Clarify ownership in partnership agreement. |
Limited Company | 100% on unlisted shares if trading. | Gift shares as PETs or use an FIC. |
Family Investment Company | Shares may qualify for BPR. |
Source: HMRC BPR guidance
Handling HMRC Scrutiny and Disputes
Be careful here, because HMRC doesn’t just take your word on BPR or valuations. They can challenge claims years after death, so preparation is key:
● Keep Robust Records: Maintain five years of financials, contracts, and asset logs. A client in Manchester avoided a £50,000 penalty by proving their business’s trading status with detailed invoices.
● Respond Promptly: If HMRC queries your valuation or BPR claim, provide evidence within 30 days. Use form IHT400’s supporting schedules for clarity.
● Appeal if Needed: If HMRC denies BPR, you can appeal via the First-tier Tribunal.
Legal advice is crucial here—costs can reach £5,000 but save far more.
Check your personal tax account for any related income tax issues, as errors (e.g., unreported business income) can flag your estate for scrutiny.
Real-World Case Study: The Patel Family’s Retail Chain
Take Priya and Sanjay Patel, who run a chain of three convenience stores in London, valued at £1.2 million, with £300,000 in savings and a £500,000 home. Their estate totals £2 million. They want to pass it to their daughter, Meera. Here’s their plan:
● Valuation: A professional valuer confirms £1.2 million for the business, all BPR-eligible.
● Gifting Strategy: They gift 30% of shares (£360,000) to Meera as a PET, reducing the estate to £1.64 million.
● Trust for Control: They place 20% of shares (£240,000) in a discretionary trust for future grandchildren, qualifying for BPR.
● Allowances: Combined NRB (£650,000) and RNRB (£350,000) total £1 million.
● IHT Calculation:
○ Estate: £1.64 million - £240,000 (trust, BPR-exempt) = £1.4 million.
○ Taxable: £1.4 million - £1 million = £400,000.
○ IHT: £400,000 × 40% = £160,000.
● Outcome: By gifting and using trusts, they cut IHT from a potential £600,000 (without BPR) to £160,000, with further savings if they survive seven years post-gift.
This shows how layered planning can transform your IHT outcome.
Worksheet: Advanced IHT Planning for Your Business
Use this to map out your strategy:
● Business Structure: Sole trader / Partnership / Limited Company / Other: _______
● Estimated Business Value: £____ (Get professional valuation)
● BPR-Eligible Portion: £____ (Confirm with accountant)
● Planned Gifts (PETs): £____ to ____ (recipient) on ____ (date)
● Trust Setup: Type: _______ / Value: £____ / BPR-eligible? Yes/No
● Other Assets (home, savings): £____
● Total Estate Post-Planning: £____
● IHT Estimate: £____ (Use Table 1 or HMRC’s calculator)
Share this with your accountant to refine your plan.
Rare Scenarios and Tax Traps
Now, let’s think about your situation—if you’re facing an unusual setup, here are traps to avoid:
● Chargeable Lifetime Transfers (CLTs): Transferring assets into a trust above the £325,000 NRB triggers immediate 20% IHT. For example, a £600,000 transfer incurs £55,000 tax (£600,000 - £325,000 × 20%).
● Hybrid Income Sources: If you mix PAYE (e.g., part-time job) with self-employed business income, ensure your tax code reflects all sources. Errors like emergency tax codes (e.g., M1, W1) can overtax you, reducing funds for IHT planning. Check your P60 or personal tax account.
● High-Income Child Benefit Charge: If your income exceeds £50,000, this charge (up to £2,075 for two children in 2025/26) limits disposable income for gifting. Adjust your plan to prioritise BPR or trusts.
Summary of Key Points
IHT applies at 40% on estates above the £325,000 nil rate band, or 36% with charitable donations.
○ Plan early to avoid forcing heirs to sell business assets.
Business Property Relief (BPR) can reduce your business’s taxable value by 100% if it’s a trading entity.
○ Confirm eligibility with an accountant to avoid HMRC disputes.
Lifetime gifts (PETs) remove assets from your estate if you survive seven years.
○ Document all gifts to track taper relief.
Trusts can protect assets and maintain BPR, but may incur upfront IHT.
○ Seek specialist advice for complex setups.
Professional valuations are critical to avoid HMRC penalties.
○ Update every 3–5 years for accuracy.
Combined allowances (NRB £325,000, RNRB £175,000) can shield up to £1 million for couples.
○ Use both spouses’ allowances strategically.
Regional variations don’t affect IHT, but Scottish income tax rates impact planning funds.
○ Check your personal tax account for accuracy.
Complex structures like limited companies require tailored share transfer plans.
○ Consider Family Investment Companies for control and tax savings.
HMRC scrutiny is common—keep detailed records to defend BPR claims.
○ Respond to queries within 30 days to avoid penalties.
Rare scenarios like CLTs or emergency tax codes can complicate planning.
○ Verify your tax code and income sources regularly.
FAQs
Q1: Can someone claim BPR if their family business has significant cash reserves?
A1: It’s a common mix-up, but excess cash can jeopard ify BPR if HMRC deems it non-essential to trading. For example, a client in Birmingham with a retail business had £200,000 in cash reserves, which HMRC challenged as an “investment” rather than trading funds. To qualify, ensure cash is tied to business operations (e.g., stock purchases). Keep detailed records showing its use and consult an accountant to strengthen your BPR claim.
Q2: What happens if a family business is partly trading and partly investment-based?
A2: Well, it’s worth noting that HMRC applies BPR only to the trading portion. Consider a Leeds consultancy with 60% trading income and 40% property rentals. Only the trading 60% qualifies for 100% BPR; the rest is taxable. A client of mine split their business into separate trading and investment entities to maximise relief. Get a professional valuation to clarify the split.
Q3: How does someone value a family business for IHT if it’s a sole trader setup?
A3: Valuing a sole trader business can be tricky, but it’s about assets like stock, equipment, and goodwill. For instance, a plumber in Cardiff valued their business at £150,000 based on tools and client contracts. Use a professional valuer to assess market value and ensure HMRC accepts it. Document all assets meticulously to avoid disputes.
Q4: Can a family business qualify for BPR if it’s been running for less than two years?
A4: In my experience, the two-year ownership rule is strict. If your business is newer, BPR won’t apply unless you’ve taken over a qualifying business (e.g., from a spouse) with continuous ownership. A client in Glasgow missed BPR on a £300,000 startup because it was only 18 months old. Plan to hold assets longer or explore gifting strategies instead.
Q5: What if someone gifts their business but continues working in it?
A5: Be cautious here—this is a classic pitfall. If you gift your business but retain control (e.g., as a director), HMRC may treat it as a “gift with reservation of benefit,” pulling it back into your estate for IHT. A client in Bristol avoided this by stepping down after gifting shares. Consult a tax advisor to structure the gift properly.
Q6: How does IHT apply if a family business has overseas assets?
A6: Overseas assets complicate things, but UK IHT applies to worldwide assets for UK-domiciled individuals. For example, a Manchester retailer with a warehouse in Ireland faced IHT on its full value. BPR can still apply if the asset is used for trading. Check for double taxation treaties to avoid paying tax twice, and get legal advice.
Q7: Can someone use their annual IHT exemption for business assets?
A7: Absolutely, you can use the £3,000 annual exemption for business assets, like cash or equipment, without affecting BPR. For instance, a shop owner in Liverpool gifted £3,000 in stock annually to their child, reducing their estate. You can carry forward one year’s unused exemption, so plan gifts strategically.
Q8: What if a family business is inherited by someone under 18?
A8: It’s a bit of a wrinkle, but minors can’t directly own business assets. The estate may need a trust until they’re 18, which can still qualify for BPR if trading. A client in London set up a bare trust for their teenager, preserving BPR. Ensure the trust is IHT-compliant with specialist advice.
Q9: How does someone check if their business qualifies as a trading entity for BPR?
A9: In my experience with clients, HMRC looks at whether your business actively trades (e.g., selling goods) rather than holding investments. Review your revenue sources—trading income should dominate. A Southampton café owner proved trading status with sales records, securing BPR. An accountant can audit your operations for clarity.
Q10: What happens if HMRC disputes a BPR claim after death?
A10: HMRC disputes can be stressful but manageable. If they challenge BPR, provide evidence like financials or contracts within 30 days. A client in Newcastle won their case with detailed trading records, saving £120,000. If denied, appeal via the First-tier Tribunal, but legal costs can hit £5,000, so prepare thoroughly.
Q11: Can a self-employed person claim BPR on their home if used for business?
A11: Partially, yes, but only for the business-used portion. For example, a freelancer in Edinburgh using 25% of their home as an office claimed 25% BPR on its value. Keep records of business use (e.g., utility splits) and get a valuer to apportion the property’s value accurately.
Q12: How does a family business owner handle IHT if they have multiple jobs?
A12: Multiple jobs don’t directly affect IHT, but income tax errors can reduce funds for planning. A client with a PAYE job and a side business in Bristol faced an emergency tax code, overpaying £2,000. Check your tax code via your personal tax account to ensure accuracy, freeing up cash for gifting or trusts.
Q13: What if a family business includes intellectual property like patents?
A13: Intellectual property can qualify for BPR if integral to trading. A tech firm owner in Cambridge included a £100,000 patent in their BPR claim, as it drove product sales. Ensure the IP is actively used in the business, not just held as an investment, and document its role clearly.
Q14: Can someone reduce IHT by paying into a pension instead of their business?
A14: Well, it’s worth noting that pension pots are generally IHT-free if you die before 75. A client in Manchester diverted £40,000 annually to their pension instead of business cash reserves, shrinking their estate. For 2025/26, contributions up to £60,000 (or your earnings) get tax relief, but check pension rules with an advisor.
Q15: How does IHT apply if a business is co-owned with a non-family member?
A15: Only your share qualifies for BPR, and co-ownership can complicate valuations. A client in Sheffield co-owned a garage with a partner; only their 50% share got BPR. Ensure partnership agreements specify ownership percentages to avoid disputes with HMRC or co-owners.
Q16: What if a family business is sold after someone’s death but before IHT is settled?
A16: If sold before probate, the sale proceeds replace the business’s value in the estate, potentially losing BPR. A client’s heirs in Liverpool sold a shop prematurely, paying £90,000 in IHT. Delay sales until BPR is confirmed, and consult an accountant to time it right.
Q17: Can someone claim BPR if their business operates in Scotland or Wales?
A17: IHT rules, including BPR, are UK-wide, so location doesn’t change eligibility. However, Scotland’s higher income tax (e.g., 42% top rate in 2025/26) reduces disposable income for gifting. A Scottish client adjusted their gifting plan to account for this. Verify income tax via your personal tax account.
Q18: How does a high-income child benefit charge affect IHT planning?
A18: The charge (up to £2,075 for two kids in 2025/26) hits incomes over £50,000, cutting funds for IHT strategies like gifting. A client in Leeds paused child benefit to simplify their tax, freeing cash for PETs. Check your liability and adjust your plan to prioritise BPR or trusts.
Q19: What if a family business involves gig economy work like freelancing?
A19: Gig economy businesses can qualify for BPR if they’re trading entities. A freelancer in London secured BPR on their £80,000 consultancy by proving active client work. Keep contracts and income records to show trading, as HMRC may question informal setups.
Q20: Can someone use life insurance to cover potential IHT on their business?
A20: Yes, life insurance in a trust can cover IHT without adding to your estate. A client in Bristol set up a £200,000 policy to cover potential IHT, paid from business profits. Ensure the policy is trust-based to stay IHT-free, and consult an advisor for setup.
About the Author
Maz Zaheer, AFA, MAAT, MBA, is the CEO and Chief Accountant of MTA and Total Tax Accountants, two premier UK tax advisory firms. With over 15 years of expertise in UK taxation, Maz provides authoritative guidance to individuals, SMEs, and corporations on complex tax issues. As a Tax Accountant and an accomplished tax writer, he is renowned for breaking down intricate tax concepts into clear, accessible content. His insights equip UK taxpayers with the knowledge and confidence to manage their financial obligations effectively.
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