This is the second instalment in our series of insights exploring why Employee Ownership should be considered. In this insight, we explore Inheritance Tax (“IHT”)and what needs to be done.
For many business owners, retaining shares in a trading company and passing them to family members has long been a favoured strategy for preserving wealth across generations. This approach leveraged the dual benefits of Capital Gains Tax (“CGT”) uplift on death and the unlimited scope of Business Property Relief (“BPR”), which exempted qualifying shares from IHT. However, upcoming changes to BPR from April 2026 mark a significant shift, reducing the relief's scope and potentially exposing a greater portion of business assets to IHT. We explore the implications of these changes and how Employee Ownership Trusts (“EOTs”) may offer a new avenue for mitigating IHT exposure.
In many cases, it had been a commercially desirable and valid tax strategy to retain shares in a trading company or group and “keep them in the family.”
The individual could have died holding their £10m of shares, and their family would have inherited them with a CGT base cost equal to market value at death. There would be no IHT on transfer because shares in a trading company should qualify for uncapped BPR. This is by contrast to holding cash or investment assets, for example, where the IHT exposure on £10m of value might have been 40% or £4m on death before any relief or exemptions are applied. As such, BPR has been a hugely valuable safety net for owners of trading companies or groups.
Not for much longer. Whilst the CGT uplift on death remains intact for now, from 6 April 2026, BPR will only be available on the first £1m of value. The balance of £9m (or more if the value is higher at death) is subject to an effective 20% charge on death, so £1.8m could now go to HM Revenue & Customs (“HMRC”) if these shares are held at death, without planning.
With an EOT, the position under old rules was that a sale would usually see the vendor going from owning fully IHT relieved shares (due to BPR) to holding cash and debt with no BPR. This may have deterred some from selling to an EOT. Under the new rules, a vendor will be going from 50% IHT relieved shares to holding cash and debt with no IHT protection - a less frightening change in their IHT profile. As before, the cash taken from the sale is a liquid asset and allows flexibility for further IHT and wealth planning.
It is perhaps also worth remembering that there should be no IHT charge on a sale to an EOT, even where it is made at undervalue. Therefore, shares in a company could potentially be gifted to an EOT for an amount below their market value. Family could later become shareholders in the company under the EOT structure and continue to be (or become) key figures with a direct stake in the business. The EOT would need to retain more than 50% of the company.
The changes to BPR from 2026 signal a critical juncture for business owners relying on tax-efficient strategies to preserve their wealth. While the reduced scope of BPR increases IHT exposure on trading shares held at death, EOTs present a compelling alternative, providing opportunities for effective IHT planning while allowing family members to remain connected to the business. As these new rules take effect, proactive planning and exploring innovative solutions like EOTs will be essential to optimize outcomes and protect family wealth in the evolving tax landscape.
Contact us today to discuss how Employee Ownership could be incorporated as part of your estate and IHT planning.
