Navigating the new inheritance tax landscape: Succession planning in a changing tax environment

Inheritance tax (IHT) is primarily charged on the value of an individual’s estate on death, including jointly owned assets. It can also apply to lifetime gifts where the donor dies within seven years of making the gift and to assets that have been given away whilst the donor continues to benefit from them.

The standard rate of inheritance tax is 40% on value above the available nil rate band, currently £325,000 per individual. An additional residence nil rate band may be available where a residence passes to direct descendants, although restrictions apply for larger estates. Unused nil rate bands can generally be transferred between spouses and civil partners.

From 6 April 2025, inheritance tax is determined by an individual’s long-term UK residence status rather than their domicile. Broadly, individuals who have been UK tax resident for at least ten out of the previous twenty tax years are subject to inheritance tax on their worldwide assets, whilst those who do not meet this threshold are generally subject only to inheritance tax on UK assets. Tax residence is determined under the Statutory Residence Test, a complex set of rules that can be particularly difficult to apply for individuals who are increasingly mobile or spend time in multiple jurisdictions.

For internationally mobile families, this represents a significant shift and places increasing importance on monitoring residence status and understanding how UK and non-UK assets will be taxed over time.

Business property relief has long been one of the most valuable inheritance tax reliefs available to business owners and entrepreneurs. Its purpose is to prevent successful businesses from being broken up or sold simply to meet inheritance tax liabilities.

Traditionally, qualifying business assets could benefit from 100% relief from inheritance tax. However, from 6 April 2026, the availability of full relief becomes significantly more restricted.

Under the new regime, each individual will have a £2.5 million allowance that qualifies for 100% business property relief. Value above this threshold will generally qualify for relief at 50%. The allowance is frozen until April 2031 and can be transferred between spouses and civil partners where unused.

The relief allowance renews every seven years for individuals and broadly every ten years for trusts which qualify for relevant property trusts. For many business owners, these changes represent a substantial reduction in the inheritance tax protection previously available and require careful succession planning.

The reforms also affect AIM shares and certain other unquoted securities. Qualifying AIM shares and similar investments will generally qualify for relief at 50% rather than 100%, regardless of whether they fall within an individual’s £2.5 million allowance.

Investors who have historically relied upon AIM portfolios for inheritance tax planning should therefore review their arrangements to understand how the new rules may affect their exposure.

The legislation contained anti-forestalling provisions designed to prevent individuals from accelerating gifts of qualifying business assets before the reforms took effect. Potentially exempt transfers made on or after 30 October 2024 still fall within the new restrictions where the donor dies on or after 6 April 2026 and within seven years of making the gift.

Accordingly, planning arrangements implemented shortly before the introduction of the new regime may not have achieved the expected result.

One of the most significant concerns arising from the restriction of business property relief is not simply the amount of tax payable, but how that liability will be funded. Where the deceased shareholder’s personal estate lacks sufficient liquidity, pressure may fall on the business itself to generate funds. This can create substantial risks for business continuity and future growth.

Extracting money from a company is not always straightforward. Dividends require sufficient distributable reserves and may trigger corporation tax and income tax costs before funds become available. Maintaining excessive cash reserves to prepare for a future liability may itself place business property relief at risk. Alternative approaches, such as share buybacks, require careful structuring to achieve favourable tax treatment and comply with company law requirements.

Insurance can provide an effective source of liquidity, particularly when combined with cross-option agreements and wider succession planning arrangements. However, these structures must be implemented carefully to ensure the intended commercial and tax outcomes are achieved.

Importantly, where inheritance tax arises on qualifying business assets inherited on or after 6 April 2026, the liability can generally be paid in ten equal annual instalments. Provided each instalment is paid on time, no interest is generally charged. This can provide considerable flexibility and allow families to preserve a business whilst the liability is funded gradually rather than through an immediate sale of shares or assets.

A family investment company (FIC) is a company established to hold investments for the benefit of a family. They have become increasingly popular because they enable wealth to be transferred to future generations without requiring the older generation to surrender control.

This separation of ownership and control is one of the key attractions of the structure. Parents and grandparents can often retain influence through voting rights or directorships whilst allowing younger family members to participate in future growth.

Family investment companies can provide a number of advantages.

They allow future growth to accrue to younger generations whilst enabling senior family members to retain influence over investment decisions and distributions. Where appropriate share structures are used, dividends can be directed flexibly amongst family members.

The company structure can also introduce governance, accountability and long-term stewardship to the management of family wealth. For families concerned about preserving assets across multiple generations, this can be particularly attractive.

In some cases, minority shareholdings may attract valuation discounts for inheritance tax purposes, reflecting the limited degree of control associated with those shares.

A FIC is generally taxed as a UK investment company. Investment income and gains are subject to corporation tax, although many dividend receipts benefit from exemption. The ability to roll up income within the company can create tax deferral opportunities when compared with direct personal ownership. However, any benefits achieved within the company must be balanced against the potential tax cost of extracting funds at shareholder level.

Whilst family investment companies remain useful succession planning tools, they are not a replacement for business property relief. Because a FIC is generally an investment company rather than a trading company, its shares do not qualify for business property relief. As a result, the value of the shares will generally remain fully exposed to inheritance tax on death, subject to any applicable valuation discounts. For this reason, the decision to use a FIC should be driven by wider succession, governance and asset protection objectives rather than inheritance tax relief alone.

For internationally mobile families, non-UK incorporated family investment companies can provide additional planning opportunities.

From an inheritance tax perspective, the key consideration is generally the situs/registration of the shares. Shares in a company incorporated and registered outside the United Kingdom will typically constitute non-UK situated assets. Under the residence-based inheritance tax regime, individuals who are not yet long-term resident, or cease to be long-term UK resident and remain outside the United Kingdom for the relevant period, may ultimately fall outside the scope of UK inheritance tax on those shares.

This can make offshore FICs attractive where family wealth and future succession are genuinely international in nature. However, the inheritance tax position is only one part of the analysis. Whilst profits retained within an offshore company may create opportunities for income tax and capital gains tax deferral, UK anti-avoidance provisions can in some circumstances attribute those profits directly to UK resident shareholders and tax them as they arise.

Separately, care must be taken to ensure that central management and control genuinely occurs outside the United Kingdom. If strategic decisions are effectively made in the UK, HMRC may contend that the company is UK tax resident despite being incorporated offshore. This is particularly relevant from an income tax and capital gains tax perspective, as UK corporate residence can significantly alter the company’s tax treatment. However, corporate residence and the location of central management and control do not determine the inheritance tax situs of the shares, which is generally determined by the place of incorporation and registration.

Used appropriately, non-UK resident FICs can be effective planning vehicles for internationally mobile families. However, successful implementation requires careful consideration of inheritance tax, income tax, capital gains tax and the relevant anti-avoidance legislation.

Trusts continue to play an important role in preserving wealth and managing succession across generations. Many individuals are understandably reluctant to transfer substantial wealth outright to younger family members. Trusts can provide a mechanism through which assets are preserved and managed whilst still allowing beneficiaries to benefit when appropriate. Trust structures can also provide protection against divorce, bankruptcy, financial immaturity and changing family circumstances.

Most modern discretionary trusts fall within the relevant property regime. Under this regime, inheritance tax charges can arise when assets enter the trust, on ten-year anniversaries and when capital leaves the trust. Whilst these charging provisions can create additional costs, many families consider the flexibility and protection offered by discretionary trusts to outweigh those disadvantages.

Qualifying interest in possession trusts are generally taxed as though the life tenant owns the underlying trust assets. Depending on the circumstances, these arrangements may continue to play an important role within succession planning strategies, particularly for second marriages and blended families.

Trusts established before 30 October 2024 that hold qualifying business assets may benefit from valuable transitional protection. Where relevant business property was settled into trust before the introduction of the new regime, the trust may continue to benefit from 100% business property relief until its next ten-year anniversary charge. This creates a significant planning opportunity for some families and means that existing trust structures should be reviewed carefully before any restructuring or additions are contemplated.

The inclusion of unused pension funds and certain death benefits within the inheritance tax regime from 6 April 2027 represents one of the most significant changes to succession planning in recent years.

Historically, pensions were often viewed as highly efficient vehicles through which wealth could pass to future generations. As a result, many individuals deliberately preserved pension assets whilst spending other capital first.

That approach may now require reconsideration. One increasingly attractive planning strategy is to draw additional pension income and gift surplus amounts to family members.

Provided the gifts form part of an individual’s normal expenditure, are made out of income rather than capital and do not affect their usual standard of living, they may qualify for the valuable exemption for gifts out of surplus income.

Unlike potentially exempt transfers, there is no requirement to survive seven years. Where the exemption applies, the transfer is immediately outside the inheritance tax regime. For many individuals, this creates an opportunity to convert assets that may become exposed to inheritance tax from April 2027 into inheritance tax-efficient lifetime gifts that can support children and grandchildren earlier in life.

Business property relief remains important, but it should not be the sole focus of a succession plan. A range of additional planning opportunities may continue to provide significant benefits depending on circumstances.

Potentially exempt transfers remain one of the simplest and most effective methods of reducing future inheritance tax exposure. Where the donor survives seven years, the value transferred generally falls outside the estate for inheritance tax purposes.

Where qualifying business assets are gifted, capital gains tax hold-over relief may permit gains to be deferred rather than crystallised at the time of the transfer. This can make lifetime gifting substantially more attractive from a tax perspective.

The exemption for gifts made from surplus income remains one of the most powerful inheritance tax planning tools available. Regular gifts made from excess income can pass entirely outside the inheritance tax regime immediately, without any seven-year survival requirement.

Following the reforms to business property relief, insurance planning has become increasingly popular. There is now insurance being provided for inheritance tax liability and even for lifetime gifting, if you incur tax due to it. Insurance can be used both to provide liquidity on death and to protect against the inheritance tax risk associated with lifetime gifts made within seven years of death.

Whilst inheritance tax often drives discussions around succession planning, the most successful arrangements address wider family and commercial objectives.
Consideration should be given to who will control assets, how future generations will participate in family wealth, whether family members are equipped to manage inherited capital and how disputes might be avoided.

Family constitutions, shareholder agreements, family councils and carefully drafted trust structures can all play an important role in maintaining stability and preserving relationships across generations. Tax planning may protect wealth. Effective governance helps ensure that wealth remains protected long after the succession process has taken place.

The inheritance tax reforms introduced between 2025 and 2027 represent the most significant changes to succession planning in many years. The restriction of business property relief, new rules affecting pensions, the move to a residence-based inheritance tax regime and increased scrutiny of wealth-holding structures mean that many existing arrangements should now be reviewed.

Whilst the planning environment has become more complex, opportunities remain available through careful use of business property relief, trusts, family investment companies, lifetime gifting and broader family governance arrangements.

For many individuals and families, the key message is clear: succession planning should be viewed as an ongoing process rather than a one-off exercise. Those who review their arrangements early are likely to be best placed to preserve wealth, protect businesses and achieve a smooth transition between generations.