When you’ve built a successful limited company, the last thing you want is inheritance tax forcing your family to sell the business just to pay the tax bill. Under proposed changes from April 2026, company shares worth £2 million could face an inheritance tax charge of £200,000. With careful planning, however, much of this burden can still be reduced or avoided.
Understanding limited company inheritance tax is essential for business owners who want to pass their company to the next generation without creating financial pressure. With Business Property Relief under increasing scrutiny and major legislative changes approaching, now is the time to review your inheritance tax strategy.
This guide explains how inheritance tax applies to company shares, when reliefs are available, and how the April 2026 changes could affect your estate. Whether you own a private limited company or hold shares in a trading business, the information below will help you reduce tax exposure while supporting smooth business succession.
Key Takeaways
- Limited company shares are subject to inheritance tax at 40% above the £325,000 nil rate band
- Business Property Relief (BPR) can reduce inheritance tax on qualifying shares by 50% or 100%
- From April 2026, BPR will be capped at £1 million, with only 50% relief on excess value
- Trading companies usually qualify for relief, while investment companies often do not
- Shares must generally be held for at least two years to qualify for business relief
- Professional estate planning is critical to reducing inheritance tax on company shares
Understanding Inheritance Tax on Limited Company Shares
Inheritance tax is charged at 40% on the value of an estate above the £325,000 nil rate band. Limited company shares form part of the deceased’s taxable estate, regardless of whether they are held in a private or public company. Shares are valued at their market value at the date of death, not the original purchase price, which can result in substantial tax liabilities for successful businesses.
The responsibility for paying inheritance tax usually falls on the executor or administrator of the estate. Tax must be settled before assets are distributed, which can create cash flow issues where most of the estate’s value is tied up in company shares rather than liquid assets.
Shares passed to a spouse or civil partner are exempt from inheritance tax due to the spousal exemption. In some cases, estates may also benefit from the residence nil rate band, increasing the total allowance to £500,000 per person where a family home is inherited.
For many business owners, qualifying for business relief is the most effective way to reduce or eliminate inheritance tax on company shares.
Business Property Relief for Company Shares
Business Property Relief can provide up to 100% inheritance tax relief on qualifying business assets. It was originally introduced to prevent family businesses being sold purely to meet inheritance tax liabilities.
Shares in private limited companies often qualify for 100% relief where the conditions are met. Shares in public companies may qualify for 50% relief if they give the shareholder control, typically more than 50% of voting rights. Shares listed on the Alternative Investment Market (AIM) can also qualify for 100% relief under current rules.
To qualify, shares must usually have been owned for at least two years before death. Where shares were inherited or gifted from someone who previously qualified for relief, holding periods may sometimes be combined.
Qualifying Conditions for Business Relief
The company must be primarily a trading business rather than an investment company. HMRC generally expects at least 80% of activities to relate to trading in order to qualify.
Companies mainly involved in property investment, land ownership, or holding investments typically do not qualify. Excess cash or assets not required for trading purposes can also reduce or remove eligibility.
If more than 20% of the company’s activities or asset value relates to non-trading purposes, HMRC may restrict or deny business relief. Active involvement or meaningful control by the shareholder also strengthens eligibility.
What Doesn’t Qualify for Business Relief
Investment companies, property rental businesses, and companies holding significant investment portfolios are generally excluded from business relief. Non-voting or minority shareholdings without real control may also receive limited or no relief.
Major Changes from April 2026
From April 2026, Business Property Relief will be capped at £1 million for the first time. This marks a significant shift for family-owned businesses and increases the importance of forward planning. Those involved in farming or landownership should also consider Agricultural Property Relief (APR).
Under the new rules, company shares above £1 million will receive only 50% relief, creating an effective inheritance tax rate of 20% on the excess value.
For example, a company valued at £2 million would face an inheritance tax charge of £200,000 on the second £1 million. Anti-forestalling rules are expected to prevent last-minute restructuring or gifting designed to bypass these changes.
Planning Strategies for Limited Company Owners
With significant changes approaching, business owners should review valuations, ownership structures, and eligibility for relief as soon as possible. Obtaining an up-to-date valuation helps clarify exposure under the new rules.
Restructuring to reduce non-trading assets, such as surplus cash or investment properties, may help preserve eligibility for business relief.
Family Investment Companies (FICs) can be effective for wealth planning but do not qualify for Business Property Relief, making them unsuitable for owners seeking relief on trading company shares.
Lifetime Gifting of Company Shares
Lifetime gifting can remove future growth from your estate. Gifts to spouses or civil partners are immediately exempt, while gifts to others are treated as Potentially Exempt Transfers (PETs).
If you survive seven years after making a gift, no inheritance tax applies. However, capital gains tax may arise when gifting shares that have increased in value, so coordinated tax advice is essential.
The main benefit of lifetime gifts is that future growth occurs outside your estate, reducing long-term inheritance tax exposure.
Insurance and Liquidity Planning
Life insurance can provide liquidity to pay inheritance tax without forcing a sale of company shares. Policies should be written in trust so proceeds fall outside the taxable estate.
Cross-option agreements funded by insurance can allow remaining shareholders to buy shares from the estate, maintaining business continuity while providing cash to settle tax liabilities.
Professional Advice and Compliance
Business Property Relief must be actively claimed using HMRC forms IHT400 and IHT413. Claims should be supported by evidence of trading activity, ownership duration, and involvement in the business.
Given the complexity of business inheritance tax planning, professional advice is essential to ensure reliefs are maximised and compliance risks are avoided.
FAQ
Do I pay inheritance tax on company shares?
Yes, if the estate exceeds £325,000, although qualifying trading company shares may receive up to 100% relief.
How long must I hold shares to qualify for business relief?
Shares must usually be held for at least two years before death, though previous ownership periods may sometimes count.
What happens to business relief after April 2026?
Relief will be capped at £1 million, with only 50% relief available on excess value.
Can I gift company shares to avoid inheritance tax?
Yes, but inheritance tax only falls away if you survive seven years after gifting, and capital gains tax may apply.
Do investment companies qualify for business relief?
Generally no. Companies must be mainly trading to qualify.
The rules around limited company inheritance tax are changing quickly. Business owners have a narrowing window to act before the 2026 changes take effect.
Professional estate planning advice can help you review your current position, assess your exposure, and implement strategies that protect your business and reduce inheritance tax for future generations.
