Optimising Business Property Relief for shareholders of trading companies – a tax planning opportunity

Significant changes were announced in the Autumn Budget (October 2024) to how Business Property Relief (BPR) will be applied from 6 April 2026. These changes could result in serious cashflow issues for bereaved families, and business owners are encouraged to consider some tax planning strategies to ‘lock-in’ this powerful relief whilst it’s available in its current form before the changes take effect.

Here we discuss the options available to a founder shareholder of a trading company which is valued at £5m.

What is the current BPR position?

Under current rules, this very powerful Inheritance Tax (IHT) relief allows for 100% relief to be claimed against the value of the shares in a qualifying unquoted trading company.  Provided the business asset has been held for at least 2 years continuously before the transfer.

This means in our example no IHT should be payable on the gift of these shares, whether during lifetime or on death.

What changes have been announced?

With effect from 6 April 2026, estates with business property will be able to claim 100% BPR on the first £1m of qualifying assets (potentially subject to any lifetime gifts of qualifying assets), with any value above this receiving 50% relief.

As a result of these proposed changes £800,000 of IHT would be payable on the same asset.

BPR planning opportunities

In line with a clear succession planning strategy, and with the expectation that any BPR allowance will reset after 7 years for direct gifts, the founding owners of the business can make gifts of part of the business to the next generation, whether as a business owner or in view of incentivising them to grow the business.

Subject to the make up of the assets in the business the founding owners may be able to make a claim to holdover the capital gain and therefore not crystallise a Capital Gains Tax (CGT) charge on the transfer.  Noting however that for IHT, should the founding owner die after 5 April 2026 but within 7 years of making the gift, then an IHT charge could arise due to the reduction in the rate of BPR.

A gift into trust could also be considered, especially where the founder owner wishes to benefit the wider family.  Assuming 100% BPR is available, the value entering the Trust will be £nil for IHT purposes provided this is carried out before 6 April 2026.  This could allow the founding owner to gift a greater value of shares into trust without an upfront tax charge compared to waiting until after this date.

Further points to note are:

• Like with a direct gift, if the founding owner were to die after 5 April 2026 but within 7 years of making the gift, then an IHT charge could arise due to the reduction in the rate of BPR.
• The changes in BPR rates will impact any IHT payable by the trust either every 10 years or when assets are distributed.
• As with a direct gift, the capital gain can be held over or deferred until such time as the business is sold or distributed away by the Trust.

Of course tax should not be the only consideration when looking at your options. As an direct comparison; outright gifts come with their risks such as loss of control, loss of cashflow during retirement, poor management by the recipients, risk of the assets being misused. This is compared to the use of a trust which create a level of asset protection and maintain control.

Please contact us if you would like further advice.