In our previous articles on the changes made to inheritance tax (“IHT”) from 6 April 2026 we have looked at the general position of shareholders and business owners and their wider IHT position on their estate. In this article, we concentrate on issues that shareholders in a private, family company may wish to consider to minimise their IHT exposure.

As a reminder, a qualifying shareholding worth more than £1m will be taxed on death on or after 6 April 2026 at an effective rate of 20% on the excess over £1m unless left to a spouse or civil partner.

Planning points

The more obvious points to consider include:

1.    Ensuring the shares qualify for relief from IHT

2.    Maximising the entitlement to the relief with an effective Will

3.    Splitting the value in the estate via lifetime gifts

4.    Transfers into trust

5.    Corporate governance

Qualifying for relief from IHT

The main qualification for relief from IHT, known as Business Property Relief (“BPR”), is a shareholding in a trading company or a holding company of a trading group. The shares must have been owned for a two year period. One problem with family owned companies can be actually qualifying as a trading company due to the purchase of assets by the company that “taint” the trading status of the company. A typical example will be the purchase of residential or commercial properties using profits generated by the company in “good” years. There is a risk that over time the property interests dominate the balance sheet or income streams of the business. The legislation refers to “wholly or mainly” for trading assets or income and so a 50% test can be applied. This is different from the test for capital gains tax (“CGT”) and Business Asset Disposal Relief when a 20% non-trading assets test will apply. Breaching the “trading company” test means the company does not satisfy the trading company status and will not qualify for any BPR meaning the shares are subject to IHT at the full rate of 40%.

The company may have developed a cash reserve, again from profits generated over time. Companies should review the need for any cash reserve and document in board minutes the reasons for the retention of a cash reserve. HMRC will look at the position overall and over a period of time to avoid fluctuations in value of assets and trading income.

One point that is forgotten is that the value of the “investment assets” will not qualify for relief at all and will be subject to 40% IHT. For example, if a company worth £10m has £2m worth of investment properties, there will be an IHT charge on the value of the £2m investment properties at 40% on the death of the shareholder or at 20% on a lifetime transfer of shares. Only the £8m of shares will qualify for BPR.

It may be sensible to consider splitting the company in two so that there is a pure trading company and an investment company. The trading company will qualify for BPR while the investment company will not qualify for the relief. A demerger can be carried out on a tax neutral basis.

An effective Will

Leaving all one’s estate to a spouse or civil partner (we use the term spouse to include a civil partner in the remainder of this article) is an easy decision to make as it gives all the wealth and decision making to the surviving spouse. Any assets left to a spouse are exempt from IHT.

The problem with leaving everything to a spouse is that any entitlement to BPR is lost, so the shareholder will have wasted the equivalent of £400,000 of IHT relief. The £1m BPR relief at 100% is not transferable between spouses. There is a “use it or lose it” rule. The Will should leave at least £1m of shares or other business assets to adult children or a trust so that the BPR is utilised on the first death. The balance can be left to the spouse to be dealt with on their death.

You should also consider who should run the company on your death. Do you need “business” executors separate from your “personal” executors who can run your business or at least are qualified to make business related decisions. Would your spouse, as your executor, be able to make decisions about your company?

Splitting value

A shareholder can consider splitting their shareholdings and the value of their estate during their lifetime by making lifetime gifts. For example, a father with three adult children, owning 100% of the shares in a company worth £5m could consider gifting shares worth £1m to each of his children. Providing the company is a trading company for CGT (remember the 20% test for non-trading assets applies), the father can enter into holdover elections so that the children take the shares at the father’s base cost so any chargeable gain is deferred until the children sell the shares. The gift is a Potentially Exempt Transfer (“PET”) which means that the gifts will be subject to IHT if the father dies within seven years of the gift. The father could consider taking out life assurance cover the pay any IHT liability depending on the size of any insurance premium.

The father would retain a 40% shareholding. New articles of association and a shareholders’ agreement is recommended to govern the management of the shareholdings in the future, such as drag along provisions and compulsory sales in the event of separation or divorce. The articles of association should allow for the payment of different dividends with the creation of different classes of shares so that it would be possible to pay a dividend to pay IHT on the father’s shares on his death without paying an equivalent dividend to the children.

The father may insist on pre or post-nuptial agreements for his married children to keep the shares within the “bloodline” and ensure that the children have Wills in place.

Family trusts

Trusts have seen a resurgence in recent years; trusts are no longer the preserve of Dickens and Jane Austen. Transfers to a trust for the benefit of the next generation can ensure that the donor (say the father) retains an element of control via the trust rather than giving the shares absolutely to adult children. Trusts can be useful for situations where the adult child is unable to make their own decisions and not just where they are “young and foolish”.

A transfer into trust can be a lifetime transfer which triggers its own immediate charge to IHT in certain circumstances. Discretionary trusts can also trigger a 10 yearly charge for IHT (at 3% due to the IHT relief for BPR rather than the usual 6% 10 yearly charge). For shares which qualify for BPR, there is an opportunity on or before 6 April 2026 to transfer shares into a trust without triggering an IHT liability. Specialist advice is essential as there are lots of traps involving trusts.

Corporate governance

Corporate governance is sometimes seen as “boring” and only relevant to companies traded on the Stock Exchange. However, directors in family owned companies are subject to similar rules. Directors should be thinking about succession planning, who will run the business and whether and how the company can fund any IHT liability on shares. If there are several shareholders, the board will need to decide whether it should pay an equivalent dividend to the other shareholders and not just the estate of the deceased shareholder. Another issue will be whether the company will support the estate of a minority shareholder and not just the estate of a majority shareholder.

Next steps

A common theme with the all the articles on the forthcoming changes to IHT is the need to take action and obtain advice sooner rather than later. There are some fairly simple and straightforward steps that owners can take to minimise their IHT exposure. However, structures need to be put in place in good time and should not be rushed. Planning regarding business assets should also be considered alongside the other assets owned by the businessperson. Doing nothing is an option; however, it can leave an expensive mess for your nearest and dearest to sort out after you have gone.