When you’ve built a successful limited company, the last thing you want is for inheritance tax to force your family to sell the business to pay the tax bill. Company shares worth £2 million could face a £200,000 inheritance tax bill from April 2026 under new rules – but proper planning can significantly reduce this burden.
Understanding limited company inheritance tax is crucial for business owners who want to pass their enterprises to the next generation without crippling tax liabilities. With Business Property Relief under threat and major legislative changes on the horizon, now is the time to review your inheritance tax planning strategy.
This comprehensive guide explains how inheritance tax applies to company shares, what relief options are available, and how upcoming changes will affect your estate planning. Whether you own a private limited company or hold shares in trading businesses, these insights will help you minimize your family’s tax exposure while ensuring smooth business succession.
Key Takeaways
- Limited company shares are subject to inheritance tax at 40% on estate values above £325,000
- Business Property Relief (BPR) can provide 50% to 100% inheritance tax relief on qualifying company shares
- From April 2026, BPR will be capped at £1 million, with only 50% relief on excess value
- Trading companies typically qualify for full relief, while investment companies may not qualify
- Shares must be held for at least 2 years before death to qualify for business relief
- Professional estate planning is essential to minimize inheritance tax on company shares
Understanding Inheritance Tax on Limited Company Shares
Inheritance tax applies at 40% on net taxable assets above the £325,000 nil rate band when someone dies. Limited company shares form part of the deceased’s taxable estate, regardless of whether they’re in a private limited company or public company. The market value of shares is determined at the date of death, not the original purchase price, which can create significant tax liabilities for successful businesses.
The person responsible for paying inheritance tax is typically the executor or administrator of the estate. They must use the estate’s assets to settle any iht liability before distributing inheritances to beneficiaries. This can create cash flow challenges, especially when most of the estate’s value is tied up in illiquid company shares.
However, shares left to a spouse or civil partner are exempt from inheritance tax due to the spousal exemption. Assets left to children or grandchildren may benefit from the additional £175,000 residence nil rate band, bringing the total potential exemption to £500,000 per person, though this only applies when a family home is also being inherited.
For many family businesses, the key to avoiding inheritance tax lies in qualifying for business relief, which can eliminate or substantially reduce the tax burden on company shares.
Business Property Relief for Company Shares
Business Property Relief provides up to 100% inheritance tax relief on qualifying business assets, making it one of the most valuable exemptions available. Previously business property relief was designed to prevent family businesses from being broken up solely to pay inheritance tax bills.
Private limited company shares typically qualify for 100% relief if they meet specific conditions, meaning no inheritance tax is payable on their value. For public limited companies, shares that give the holder a controlling interest (generally over 50% of voting rights) receive 50% relief. Companies listed on the Alternative Investment Market also qualify for 100% relief under current rules.
The relief only applies if shares have been held for at least 2 years immediately before death. If shares were acquired within this period through a gift from someone who had previously qualified for business relief, the holding periods may sometimes be combined to meet the two-year requirement.
Qualifying Conditions for Business Relief
The fundamental requirement for business relief is that the company must be primarily a trading business rather than an investment company. A trading company is one that exists “wholly or mainly” for trading purposes, with HMRC generally considering 80% or more trading activity as sufficient evidence.
Companies dealing mainly in land, buildings, or holding investments do not qualify for relief. This includes businesses focused on rental income from property portfolios or companies that maintain substantial investment portfolios rather than conducting active trading operations.
Surplus cash or other assets that aren’t required for business operations can also reduce or eliminate relief 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 entirely.
The deceased must also have been actively involved in the business or held qualifying shares that provided meaningful control or influence over company operations. Simple minority shareholdings without voting rights or business involvement are less likely to qualify for full relief.
What Doesn’t Qualify for Business Relief
Investment companies focused on property rental or managing share portfolios are specifically excluded from business relief. Companies with more than 20% non-trading activities or excess cash reserves that aren’t needed for business operations risk losing their qualifying status.
Shares held through certain trust structures may face restrictions or complete denial of relief, particularly if the trust itself holds non-qualifying assets or fails to meet the “relevant business property” test. Non-voting shares or minority interests without meaningful business control are also less likely to receive full relief benefits.
Not for profit organisations and community amateur sports clubs follow different rules and may not qualify for the same relief levels as commercial trading businesses.
Major Changes from April 2026
The most significant change to inheritance tax planning for business owners comes into effect in April 2026, when Business Property Relief will be capped at £1 million for the first time in its history. This represents a fundamental shift in how inheritance tax iht affects larger family owned businesses, and it’s important to also consider Agricultural Property Relief (APR) for those involved in farming or landownership.
Under the new iht rules, company shares valued above £1 million will receive only 50% relief rather than the current 100% exemption. This creates an effective 20% inheritance tax rate on the excess value above the £1 million threshold.
For example, a private company valued at £2 million would face £200,000 in inheritance tax on the second million under the new rules. The first £1 million would still receive full relief, but the remaining value becomes subject to reduced protection.
Anti-forestalling measures have been proposed to prevent business owners from circumventing these changes through last-minute gifting shares or restructuring arrangements shortly before April 2026. These rules aim to ensure that the new limitations apply regardless of planning activities undertaken in anticipation of the changes.
| Company Value | Current IHT (with BPR) | 2026 IHT (with capped BPR) | Additional Tax |
|---|---|---|---|
| £500,000 | £0 | £0 | £0 |
| £1,000,000 | £0 | £0 | £0 |
| £2,000,000 | £0 | £200,000 | £200,000 |
| £5,000,000 | £0 | £800,000 | £800,000 |
Planning Strategies for Limited Company Owners
Given the complexity of inheritance tax rules and the forthcoming changes, business owners need to review their current shareholdings and develop comprehensive tax planning strategies. The window for implementing certain planning techniques under current rules is rapidly closing.
Consider obtaining up-to-date business valuations before April 2026 to understand your potential iht exposure under the new rules. This baseline assessment will help determine whether your estate exceeds the £1 million BPR threshold and by how much.
Restructuring company assets to maximize trading activities and minimize non-qualifying investments can help ensure continued qualification for business relief. This might involve disposing of surplus cash, investment properties, or other non-trading assets that could jeopardize the company’s qualifying status.
Family Investment Companies (FICs) offer another wealth management strategy, though their shares don’t qualify for Business Property Relief since they’re classified as investment vehicles. FICs work best for high net worth families with substantial investment portfolios rather than active trading business owners seeking iht benefits.
Lifetime Gifting of Company Shares
Gifting shares during your lifetime can be an effective way to avoid inheritance tax, particularly given the upcoming BPR limitations. Gifts to a spouse or civil partner are immediately exempt from inheritance tax due to the spousal exemption rules.
Gifts to children or other family members become Potentially Exempt Transfers (PETs). If you survive seven years after making the gift, no inheritance tax applies to the gifted shares. This seven years rule provides a clear timeline for estate planning purposes.
Taper relief reduces the tax liability for gifts made 3-7 years before death, with the tax burden decreasing gradually over this period. However, gifting shares may trigger capital gains tax if their capital value has increased since acquisition, so professional advice is essential to manage both taxes effectively.
The key advantage of lifetime gifts is removing future growth from your estate. Shares gifted today will appreciate in the hands of the recipients rather than increasing your estate’s iht liability.
Family Investment Companies
Family Investment Companies allow parents to retain control through voting shares while transferring future growth to younger generations through non-voting growth shares. Parents typically hold preference shares that provide income and control, while children own ordinary shares that benefit from capital appreciation.
While FICs offer excellent control and flexibility for wealth transfer, their shares don’t qualify for Business Property Relief since they’re investment vehicles rather than trading businesses. This makes them unsuitable for business owners seeking to minimize inheritance tax on trading company shares, but valuable for managing other investment assets.
Insurance and Liquidity Planning
Life insurance can provide crucial liquidity to pay inheritance tax liabilities without forcing the sale of company shares. Policies should be written in trust to prevent the insurance proceeds from increasing the deceased’s taxable estate.
Cross-option agreements funded by life insurance can facilitate smooth share transfers while providing the estate with cash to meet tax obligations. These arrangements typically involve the company or remaining shareholders purchasing the deceased’s shares using insurance proceeds, ensuring business continuity while providing estate liquidity.
Consider whether your limited companies have sufficient liquid assets to support inheritance tax payments. While iht can be paid in ten annual installments for qualifying business assets, this option requires careful cash flow planning to avoid business disruption.
The inheritance tax account must be submitted within 12 months of death, with payment typically required within six months. Planning for these deadlines is essential to avoid penalties and interest charges.
Shareholders’ Agreements and Succession Planning
Comprehensive shareholders agreements should address death and succession scenarios to prevent disputes and ensure tax-efficient outcomes. These agreements typically include pre-emption rights that control who can inherit or purchase shares, protecting the business from unwanted third-party involvement.
Valuation mechanisms should be agreed in advance to avoid disputes when shares need to be valued for inheritance tax purposes or internal transfers. Consider whether valuations should reflect minority discounts or marketability restrictions that might reduce the inheritance tax burden.
Buy-back provisions funded by life insurance policies can provide liquidity while maintaining family control. These arrangements require careful structuring to ensure they don’t inadvertently trigger adverse tax consequences or affect business relief qualification.
Regular reviews of shareholders agreements ensure they remain aligned with current tax legislation, business objectives, and family circumstances. The 2026 changes make such reviews particularly urgent for larger family businesses.
Professional Advice and Compliance
Executors must actively claim business relief using HMRC forms IHT400 (the main inheritance tax return) and IHT413 (business interest and partnership property schedule). The relief isn’t automatically applied – it must be specifically claimed and supported with appropriate documentation.
Professional valuations are frequently required for private company shares, and HMRC may challenge valuations they consider excessive. Using qualified business valuers with experience in inheritance tax matters helps ensure valuations are robust and defensible.
The complexity of inheritance tax planning, particularly around business interests and partnership interests, makes professional advice essential. Tax advisers can help navigate the qualification requirements, optimize relief claims, and ensure compliance with reporting obligations.
Regular estate planning reviews become even more critical as the 2026 changes approach. The interaction between inheritance tax, capital gains tax, and income tax on business assets requires coordinated professional input to achieve optimal outcomes.
Documentation must be properly maintained to support business relief claims. This includes evidence of the company’s trading activities, the deceased’s involvement in the business, and the duration of share ownership.
FAQ
Do I pay inheritance tax on company shares?
Yes, if the total estate exceeds £325,000, but business relief may provide up to 100% exemption for qualifying trading company shares. Investment companies and non-qualifying businesses don’t receive this protection.
How long must I hold shares to qualify for business relief?
Shares must be held for at least 2 years immediately before death to qualify for relief. If you received the shares as a gift, the previous owner’s holding period may sometimes count toward this requirement.
What happens to business relief after April 2026?
Relief will be capped at £1 million, with only 50% relief available on company values above this threshold. This means larger businesses will face substantial inheritance tax bills for the first time.
Can I gift company shares to avoid inheritance tax?
Yes, but gifts become Potentially Exempt Transfers and only escape tax if you survive seven years after making the gift. Capital gains tax may also apply when gifting appreciated shares.
Do investment companies qualify for business relief?
Generally no, companies primarily dealing in investments, property rental, or land do not qualify for relief. The company must be mainly engaged in trading activities to qualify.
How is the value of private company shares determined?
Shares are valued at market value on the date of death, often requiring professional valuation for private companies. This value determines both the inheritance tax liability and any available relief.
The landscape of limited company inheritance tax is changing dramatically. Business owners have a narrow window to implement planning strategies under current rules before the 2026 restrictions take effect. Whether you’re looking to claim business relief, minimize tax exposure, or ensure smooth succession planning, the time to act is now.
Professional estate planning advice becomes even more valuable as these changes approach. Review your current arrangements, understand your potential tax burden under the new rules, and implement appropriate strategies to protect your family business and minimize the inheritance tax payable by future generations.
