Business Relief: What Business Owners Need to Know

What qualifies for business relief

Relief is available on interests in a trading business, whether a sole trade, a partnership share or unquoted shares in a trading company. Shares quoted on a recognised stock exchange generally do not qualify, although some shares traded on AIM have historically attracted relief at the higher rate.

A lower rate of relief applies to certain assets used in a business but owned personally, such as land or buildings from which a company you control trades. The distinction between assets held inside and outside the trading entity is frequently overlooked and can materially change the outcome.

The qualifying conditions

The core requirements are consistent and strict:

• The asset must generally have been owned for at least two years before death or transfer
• The business must be trading, not wholly or mainly investment in nature
• Businesses dealing in securities, land or investments are excluded
• Excepted assets — surplus cash or investments not used for trading — are stripped out
• A binding contract for sale of the business at death can remove relief entirely
• Relief must be claimed and evidenced by the executors

The trading test in practice

HMRC looks at the business in the round: turnover, asset composition, time spent by directors and employees, and profit sources. A company that has accumulated large cash reserves or a property portfolio alongside its trade can drift towards being 'wholly or mainly' investment, jeopardising relief on the whole holding rather than just the surplus.

This makes balance sheet management an estate planning issue, not just a commercial one. Retaining excessive cash for no articulated business purpose is one of the most common ways owners quietly erode their relief. Documenting the intended use of reserves, and reviewing the position annually, protects the position.

The April 2026 changes

From April 2026, the amount of qualifying business and agricultural property attracting 100% relief is capped, with the excess attracting relief at a reduced rate. The cap is set per person and is not transferable between spouses in the way the nil-rate band is, which changes how ownership should be arranged between couples.

For owners of substantial businesses, this can create a real inheritance tax liability where none was previously expected, and it may need to be paid before the business can be sold or restructured. Reviewing ownership splits, shareholdings, will drafting and liquidity planning ahead of the change is now a priority rather than a refinement.

Planning around the relief

Sensible steps include equalising shareholdings between spouses so each has a cap to use, reviewing cross-option agreements so shares pass to family rather than being subject to a binding sale, and separating genuine trading assets from investment activity where commercially appropriate.

Life cover written in trust remains a practical answer to the liquidity problem, providing cash for a tax bill that would otherwise have to come out of the business. Where shares are to pass into trust, timing and valuation both matter, and advice should be taken before any transfer is made.

Reviewing your position now

Owners who assumed their business would pass free of inheritance tax should not rely on that assumption. The value of the business, the composition of its balance sheet, how shares are held between family members and what the wills say all need to be looked at together.

Our advisers work with business owners and their accountants to quantify the exposure under the new rules and set out succession options in plain terms, from ownership restructuring through to funding the eventual liability.

Frequently Asked Questions