The £1 Million Inheritance Tax Trap: A Wake-Up Call for UK Founders
Introduction: The Inheritance Tax Wake-Up Call You Didn't Know You Needed
Most business owners operate under a comforting assumption: their company, the asset they've spent a lifetime building, is largely shielded from Inheritance Tax (IHT). For years, this has been true thanks to a generous tax relief. But significant, under-the-radar changes are set to arrive in April 2026 that could dismantle that protection and create unexpected, costly tax bills for your family.
This article, based on insights from our partner IHT tax consultant, Sanjay who reveals the most surprising and impactful takeaways from these upcoming IHT changes. It’s designed to give you the clear, practical information you need to prepare your business and your family for what's coming.
The New £1 Million Allowance is 'Use It or Lose It'
Previously, Business Property Relief (BPR) offered unlimited IHT relief on qualifying business shares, meaning you could pass on a company of any value to the next generation tax-free.
That is about to change. From April 2026, BPR will be capped at a £1 million allowance per person. Any value in your business shares above this £1 million limit will be subject to the standard 40% Inheritance Tax rate upon your death.
However, the most critical and counter-intuitive aspect of this new rule is its inflexibility. Unlike your personal IHT allowances (£325,000 and £175,000), this new £1 million BPR allowance cannot be transferred to a surviving spouse or civil partner. It is a strictly "use it or lose it" relief. If you leave your business shares to your spouse and don't use your personal £1 million allowance, it is lost forever.
The business property relief rate doesn't move over. It's a use it or lose it situation.
Your Business Might Not Qualify for Relief at All
The new £1 million allowance is only valuable if your business qualifies for BPR in the first place, and eligibility is not guaranteed. BPR only applies to "trading companies," not "investment companies," and the distinction is often surprisingly narrow.
Here are two common scenarios where a business owner might mistakenly believe their company qualifies:
1. The Structural Trap: Many businesses operate with the main trade in one company, while the property it uses—such as an office or warehouse—is held in a separate, unconnected company owned by the same person. In this structure, HMRC would consider the property-holding company an "investment company," making it entirely ineligible for BPR. This is why seeking advice on creating a formal group structure, where the property-holding company is a subsidiary of the trading company, is essential to ensure the entire operation qualifies for relief.
2. The Cash Trap: A company can start its life as a trading entity (e.g., a consultancy) and, over time, morph into an investment company. If trading activity winds down and the company accumulates a large amount of cash that isn't being used for trading purposes, its primary value may shift from trading to investment, disqualifying it from BPR.
This highlights a crucial point: BPR eligibility is not a one-time decision you make when setting up. It is an ongoing state that must be continually monitored to ensure your business remains compliant.
So something that is starts as a trading company can turn into an investment company if it's not if the trading doesn't continue.
The Danger of Gifting: How You Could End Up Paying Tax Twice
With the new £1 million BPR cap, one obvious strategy is to reduce the value of your estate now by gifting assets. However, this path is fraught with its own tax dangers. Gifting assets is a well-known estate planning strategy. If you gift an asset and survive for seven years, it is removed from your estate for IHT purposes. However, this "seven-year rule" comes with a significant and often overlooked danger when gifting assets like property or shares.
When you gift an asset, you trigger a potential Capital Gains Tax (CGT) charge on any increase in its value since you acquired it. This is known as a "dry tax charge" a real tax bill you must pay without receiving any cash from a sale. Think of it as a major tax invoice landing on your desk for a deal where you received no revenue.
This creates a potential worst-case scenario:
• You gift a property to your child, paying a 24% CGT charge on its appreciated value.
• You then pass away within the seven-year window.
• The property falls back into your estate and is now subject to a 40% IHT charge.
Crucially, your estate gets no credit for the CGT you already paid. This is a critical warning against simplistic estate planning and underscores the importance of seeking expert advice before making significant gifts.
Your 'Simple' Will Could Waste £1 Million of Tax Relief
The most common estate planning tool for couples is a "mirrored will," where each partner leaves their entire estate to the surviving spouse on the first death. While simple, this approach is now a major tax trap for business owners.
As established previously, the new £1 million BPR allowance is "use it or lose it" and cannot be passed to a spouse. A standard mirrored will, by automatically transferring all assets to the surviving partner, guarantees that the £1 million BPR allowance of the first person to pass away is wasted. The surviving spouse is left with only their own £1 million allowance to cover the entire value of the business shares they now own.
To avoid this, business owners must update their wills. The new strategy involves specifically directing BPR-eligible assets (up to the £1 million limit) to children or a trust upon the first death, thereby utilising the allowance instead of letting it vanish.
There's a Closing Window to Protect Your Business with a Trust
If direct gifting carries the risk of a double tax charge and a loss of control, trusts offer a more sophisticated and secure solution, but the window to use them to their full potential is closing. Trusts offer a powerful way to move assets out of your personal estate while allowing you to retain control as a trustee. They also provide a vital layer of protection, safeguarding assets from future events like a child's divorce.
For business owners, trusts present a unique and time-sensitive planning opportunity. The same BPR that applies upon death also applies when moving business shares into a trust during your lifetime.
Before April 2026: A business owner can potentially move their entire multi-million-pound trading company into a trust with no lifetime IHT charge.
After April 2026: Moving business shares worth more than £1 million into a trust will trigger an immediate 20% lifetime IHT charge on the excess value.
This creates a clear and urgent call to action for owners of businesses valued over £1 million. The window to use this highly effective succession planning tool without incurring a significant tax charge is closing.
Conclusion: Your Plan for 2026 Starts Today
The landscape for Inheritance Tax and business succession is changing fundamentally. The long-standing, unlimited relief that founders have relied on is being replaced with a more complex system of allowances and rules that are easy to fall foul of. A simple mirrored will can no longer be relied upon, and the very definition of a "trading company" requires careful and continuous review.
While these changes present significant risks, they can be managed with proactive planning and expert advice. The key is to understand the new rules and restructure your personal and business affairs accordingly.
The rules change in April 2026, but the time to act is now. Is your succession plan ready?
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Disclaimer: This article provides general information and is for informational and educational purposes only. It does not constitute financial advice. The suitability of any financial product or strategy, including financial wellness apps, depends on your individual circumstances. Always do your own research and consider seeking independent financial advice.