What do the proposed changes to business property relief mean for Investors and Entrepreneurs and their businesses?

We have all seen (and heard!) the tractors in Westminster. For Farmers the proposed changes to agricultural property relief and business property relief (BPR) have created widespread concern and need for them to consider the future viability of their businesses. But BPR is not only something relied on by Farmers, it is claimed by successful business owners, their families, trusts and estates every day.

The new rules (which were published in more detail in HMRC’s consultation on 27 February 2025) will have a huge impact on the amount of inheritance tax (IHT) payable for those whose primary wealth consists of, or derives from, a business qualifying for BPR. This article considers the impact of the proposed changes not only for those individuals, but for their trustees and crucially the businesses themselves.

Typically there are three occasions where BPR is claimed:

• On death, by the executors of a deceased including in relation to failed potentially exempt transfers;
• On a lifetime transfer which is an "immediately chargeable transfer" for example a transfer into trust; or 
• In accordance with the relevant property regime under which IHT is payable (broadly) on trust assets at up to 6% every 10 years or when assets exit the trust.

For someone with a valuable interest in a trading business, the amount of IHT payable on one of these chargeable events will increase considerably following April 2026. Take a successful entrepreneur with a qualifying interest in a trading business worth £5,000,000. Under current rules, on their death that interest would pass to their chosen heirs free of IHT. Under the new rules, £4,000,000 (ignoring any available nil rate band) of that will attract only 50% relief and the balance will be taxed at 40% (an effective rate of 20% on the whole) meaning the executors must find an additional £800,000 liquidity to fund the IHT before taking into account any other value in the estate. This calculation ignores any other interests, e.g. under qualifying interest in possession trusts, which may share the £1m allowance and is therefore a best case picture.

The big question that individuals will therefore need to consider during their lifetimes in the context of their succession planning and their Wills is, will there be sufficient liquidity in their estate to fund that and where does it come from? If the main source of liquidity is from the business itself, what does that mean for the future of the business? Can steps be taken to mitigate and plan for that now to prevent the business (or their interests) being sold following their death?  Whilst it should be possible for the IHT to paid in instalments over 10 years (with interest relief such that that is not charged provided payments are made on time), a plan will still need to be made regarding the funding of those instalments. If a dividend from the Company or a sale of shares is required, is the right person appointed to deal with that? Does the company have sufficient reserves to fund the liability, and if not, how might it create them?  What about the (potentially penal) tax consequences of that funding?

For directors of the business themselves, there are important additional considerations. What is the role of the board in these sorts of discussions? Where the board is made up of family members and shareholders, how do they navigate potential conflicts of interest? Directors must, at all times, act in accordance with their statutory and fiduciary duties, and so it will be important for them to consider the interests of the company when considering whether company profits should be used to fund IHT liabilities of a shareholder’s estate. Where there are non-executive directors, or other external voices on the board, they will be particularly conscious of the need to make sure any actions by the company, which are taken to ease the shareholders’ tax position, are taken properly and with due care and consideration for the consequences to the business.  

To avoid hefty IHT charges on death, the immediate buzz following the announcement of the proposed changes was that individuals need to consider giving assets qualifying for BPR away now; banking the relief while it is still available. This is an attractive option and will be the approach taken by many ahead of April 2026 (particularly now the consultation has confirmed the £1m allowance will renew every seven years), but it is important to consider in the case of outright gifts the recipients own personal and financial circumstances and their own IHT liability. How will they fund the IHT if the donor were to die within seven years, or how would their estate fund the IHT in the event of their own death?

Again, questions relating to the company itself arise where gifting the shares is a proposed solution. With many family- or founder-owned businesses, the question of business succession is an important one, and it is key that proper arrangements are put in place – at board level, and in the company’s constitutional documents – in order to ensure any change of shareholder does not affect the business’ success.

On a practical level, business owners looking to gift shares in these circumstances should be aware of potential company law roadblocks. Restrictions on transfer, or reserved matters in a shareholders’ agreement, might make the actual gifting process more complicated than expected. Whilst these challenges can more often than not be overcome, it is crucial that they are addressed (alongside the tax and other prudent considerations such as asset protection), in good time ahead of any gifting.

It may be that a gift into trust is preferred to provide a level of asset protection, or to defer benefit to a wider class of beneficiaries. Gifts of 100% BPR assets into trust can still be achieved without an immediate 20% IHT charge before April 2026 and therefore this is a good way of moving value out of an individual’s estate and into an asset protective wrapper. Provided the settlor survives seven years, their £1m allowance will not be used. However, settlors and their trustees will need to look ahead at how they will fund the future IHT liabilities. The same applies to existing trusts created before the 30 October 2024 budget changes were proposed.

Under the current rules no IHT is payable if the trust owns only assets qualifying for 100% BPR. However, under the proposed changes the benefit of 100% relief will be capped at £1m during each relevant ten-year period with only 50% relief being available on the balance and trustees could suddenly find themselves exposed to effectively a 3% IHT charge every ten years or on exits, subject to the complicated set of rules for calculating these charges and certain transitional provisions on the first ten year anniversary proposed to be introduced under HMRC’s consultation. Settlors and Trustees also cannot take one of the Settlors’ trusts in isolation from others, as for trusts created after April 2026 the £1m allowance will be applied on a chronological basis to the first trust created. It cannot therefore be assumed that every trust will have this allowance and a holistic look at all estate planning is required.  

Furthermore, in many cases the Trust assets will consist primarily of the BPR qualifying shares and therefore the Trustees will need to look to the company to fund that IHT liability (e.g. through dividends or perhaps a buyback of shares).  Contributions of capital from other sources would likely have other adverse tax consequences which would need to be carefully considered. The payment of IHT therefore needs to be an ongoing consideration not only for the trustees but also for the underlying company too. Directors should be considering and pre-empting ten-year anniversary charges (and any grossed-up value to account for income tax on a dividend if that is a considered route) when making investment decisions, as much as trustees would do. When doing so, the directors will also be aware of the need to consider more fully their duties as directors and needing to balance potentially competing interests, as above.

There should be dialogue between the trustee shareholders and the directors at an early stage. This overlap between the corporate and the shareholder/trust mechanics and indeed corporate and private tax laws needs to be carefully considered to ensure the most tax efficient route is taken.

Likewise, where BPR qualifying shares have been sold and the proceeds or their invested proceeds sit within the trust, trustees and their investment managers need to consider the funding of their periodic IHT charges in the course of their investment decisions and there may therefore be a need now to reconsider the appropriateness of any investment strategies. Before the company / trustees can consider their funding strategy it will first be essential to value the business; modelling the impact of the proposed changes and apply any appropriate discounts.  There will no doubt be a growing need for preliminary valuations, as well as ones at the time of the relevant IHT chargeable event.

It is hoped that for most successful businesses funding of the new IHT liabilities will be possible with good planning and professional advice, but for some these unforeseen tax liabilities may seem disproportionate to the benefits achieved by the trust and the decision may be taken to wind up or restructure the trust. If that is the case careful consideration needs to be given to how that is done and, on a wind up, what safeguards can be put in place to minimise the loss of the trust’s asset protection, including considering the company's articles, shareholder agreements and the beneficiaries’ own succession arrangements including Wills, Lasting Powers of Attorney and Pre-Nuptial Agreements.

Any such planning should be considered carefully before the first ten-year anniversary after April 2026 (when the new provisions would apply according to HMRC’s recent consultation) to avoid additional IHT on the winding up of the trust. It is also essential that the applicability of BPR is heavily tested as the expectation is that HMRC will consider applications for BPR very carefully ahead of the changes to include, we imagine, scrutiny of surplus cash in the context of excepted assets which are left out of account for the purposes of BPR and would therefore increase the IHT payable. Businesses should be ready to justify their cash balances where held for current or future business purposes, and to keep good records on this between any chargeable events.

It is vital in any restructuring that advice is taken on all personal, private tax, corporate tax, company law and family aspects across the piece to ensure that there are no immediate / adverse consequences and that the plan works through into the future.