Many successful business owners believe that as long as their business generates strong cash flow, there is no need for an exit strategy. They assume they can enjoy the income and pass the business on to their family IHT tax-free.
However, from April 2026, this assumption is incorrect. Like farms, private company shares passing to family on death will now be subject to Inheritance Tax (“IHT”) after Business Property Relief. The first £1 million will be at 100% relief thereafter there is 50% relief which means everything over £1 million current value at death in a trading company is subject to 20% IHT tax on death. This means, business owners with valuable companies need to reconsider their strategy. We believe that there are four key options:
- Insurance – Tax-efficient insurance (like ‘Relevant Life’ or ‘Keyman’) can help mitigate risks of IHT on the estate or if Business Property Relief (“BPR”) status changes.
- Realise your company’s value – Sell the business through a trade sale or an Employee Ownership Trust. Owners can gift proceeds or make a share gift just before the sale.
- Gift shares to children – Use Business Property Property Relief ‘holdover’ to transfer shares tax free.
- Let the estate pay the IHT – Accept the 20%* tax burden and leave your heirs to manage the cost. Or again as above insure the risk.
- Insurance
Business owners should act now to secure their legacy and avoid unexpected tax liabilities. Even if temporary, the insurance option is an immediate win, and Avondale can arrange indicative quotations early on in the process. As the saying goes ‘a man who dies without adequate life insurance should have to come back and see the mess he created’.
- Realising your company’s value
Selling your company unlocks a range of options, including the freedom to spend the capital. Employee Ownership Trusts (EOTs) offer 0% Capital Gains Tax and trade sales are still taxed at significantly lower rates than Income Tax or IHT.
A sale can also prevent family disputes – passing on shares with an IHT liability can create significant pressure amongst your heirs. Whilst transfers to a spouse remain tax-free, the IHT now due on private company shares presents a planning challenge that a sale can eliminate. An EOT can also serve as a legacy strategy, bypassing IHT and HMRC whilst rewarding employees instead. Meanwhile, trade and private sales remain highly active, with ample capital seeking strong investment returns. If a valuable company is sold, sellers should be aware that IHT is due on their estate and there is no tax relief above the allowance levels (other than to Spouses) so some will choose to gift Capital tax-free to family members as potentially exempt Transfers (PETS) https://www.gov.uk/inheritance-tax/gifts . The tax is 40% on a ‘cash’ gift if you die straightaway but it tapers to 0% if you live 7 years from the point of gift. It’s critical to formally document gifts.
- Gifting shares to children
BPR is a key IHT relief that can reduce the taxable value of qualifying business assets – including shares in a trading business by up to 100%. This means that if shares qualify for BPR, they can be passed on free of IHT either during the owner’s lifetime or upon death.
If you gift shares in a qualifying business to your children, BPR can apply, but there are some important conditions and potential tax implications to consider.
Firstly, the business must be a trading company (not mainly investment-based) and you must have owned the shares for at least two years prior to gifting them. If your children sell the shares, they may face CGT on any gains (unless they qualify for reliefs like Business Asset Disposal Relief). If concerned about losing control, consider alternative methods like family trusts, which can help retain influence whilst benefiting from BPR.
- Let the estate pay the IHT
Accepting that we will eventually pass on, is part of life, but thoughtful planning can help us benefit from the wealth we have created during our lifetime. Building a successful business is a significant achievement, and whilst the new IHT rules on private shares reflect the Government’s need to address fiscal challenges, some may view paying the IHT tax (20%*) as a contribution towards social support. For those who choose this path, it can be seen as a way of giving back, redistributing wealth, and ensuring their legacy benefits both their heirs and the wider community.
Business owners with ‘valuable companies’ should act now to secure their legacy and avoid unexpected tax liabilities.
