Recent changes to the UK’s inheritance tax (IHT) regime are set to have a lasting impact on the way family businesses plan for succession and generational transfer of ownership. Announced as part of the Autumn 2024 Budget and due to come into effect in April 2026, these changes centre on Business Property Relief (BPR), a key mechanism previously relied upon by family-run and closely held businesses to pass assets on to the next generation with minimal tax liability.
BPR has historically served as a cornerstone of the UK’s IHT framework for businesses. It offered 100% relief on qualifying business assets, effectively allowing business owners to transfer their interests to heirs without triggering IHT liabilities. This arrangement recognised the public and economic value of supporting continuity in family businesses and protected them from the liquidity crises that can arise when large tax bills fall due upon death.
However, the government’s recent policy shift introduces a cap on the value of assets eligible for full relief, significantly altering the tax landscape for entrepreneurs and family business owners alike.
What Has Changed with Business Property Relief?
Under the new rules, which take effect from the 2026–27 tax year, the first £1 million of qualifying business property will continue to benefit from 100% relief. However, for any value above this threshold, relief will be reduced to 50%. This effectively means that, on the excess value, a 20% IHT rate will apply (as opposed to the full 40% standard rate).
To illustrate, consider a business valued at £3 million. Previously, the entire value could have been passed on to beneficiaries tax-free under BPR. Under the revised system, only the first £1 million will be exempt from IHT. Of the remaining £2 million, 50% (£1 million) will be taxable—resulting in an IHT bill of £400,000.
This change reflects the government’s broader efforts to balance tax fairness with fiscal responsibility, targeting higher-value estates without removing BPR entirely. However, the practical consequences for SMEs and family-owned businesses could be significant.
What Does This Mean for Me?
For business owners, particularly those running family firms, this reform introduces several financial and strategic considerations that need urgent attention.
First and foremost, the new rules create the risk of a liquidity squeeze for inheritors. Many family businesses, especially those in sectors such as agriculture, retail, or manufacturing, are asset-rich but cash-poor. If heirs are faced with large IHT bills that cannot be covered by available liquid assets, they may be forced to sell parts of the business, take out loans, or dilute ownership—all outcomes that could disrupt the long-term viability and independence of the enterprise.
These changes also add urgency to succession planning. Business owners will need to consider not only who will take over, but how they will financially manage the transition. Tools such as lifetime gifts, family trusts, and business protection insurance may become more prevalent as business owners seek to shield successors from tax exposure.
Moreover, the IHT changes may influence decision-making in the years leading up to a transfer. Owners may delay handing over control, restructure the business to ring-fence certain assets, or alter investment and reinvestment plans to maintain greater liquidity in preparation for potential tax liabilities.
In addition, the psychological impact of the reform cannot be overlooked. For many family business owners, succession is about more than tax; it is about legacy. The idea that part of a business must be sold or broken up to satisfy a tax bill undermines the ethos of building something sustainable and passing it on intact.
Conclusion
The new cap on Business Property Relief represents a meaningful shift in the UK’s inheritance tax policy. While not abolishing BPR outright, the reform changes the financial calculus for business owners contemplating succession. The cost of doing nothing has now increased. The prospect of heirs facing six-figure tax bills requires business owners to act early, plan strategically, and engage with advisers who understand both the commercial and emotional dimensions of succession.
For UK SMEs and family-run enterprises, the key message is this: don’t wait until a crisis forces your hand. With the right planning, it is still possible to preserve your business legacy and manage tax exposure—but the window to do so is narrowing.
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services Limited - a Marketing & Content Agency for the Professional Services Sector.
