Changes mean significant impact on potential IHT exposure for many business owners and their families

The Government announced significant reforms to the UK Inheritance Tax (IHT) regime in last Autumn’s Budget. 

These changes will have a significant impact on the potential IHT exposure for many business owners and their families, highlighting the need for early intervention in the form of careful and long-term succession planning.

Lucy Tootill and Sophie Herberts look at the key points and impact. 

This article covers the key changes and five succession planning opportunities business owners should review now:

1. Shareholder protection policies, whether written into trust for the remaining shareholders or the company

1. Growth shares to preserve the value for future generations
2. EMI options
3. Family Trusts and Family Investment Companies and
4. Returning value to shareholders of surplus cash.

Key changes

Key changes to the IHT regime from 6 April 2026 included:

• Cap on Business Property Relief (BPR): The long‑standing position of unlimited 100% relief is replaced by a £2.5 million cap per individual on combined business and agricultural assets. Qualifying assets above this threshold receive 50% relief, resulting in an effective 20% IHT charge.
• Transferable relief between spouses: The £2.5 million allowance is transferable between spouses or civil partners, allowing up to £5 million of qualifying assets to pass free of IHT, but only on second death and to the extent unused on the first death.
• Reduction in relief for certain shares: relief for qualifying unlisted shares, including Alternative Investment Market (AIM) shares, will reduce from 100% BPR to 50%, effectively bringing more investments into the IHT net.
• IHT thresholds frozen until 2031: The nil‑rate band (£325,000) and residence nil‑rate band (£175,000) remain frozen, increasing exposure over time as asset values rise.
• It is also worth noting that whilst unused pension assets and death benefits can currently be passed to beneficiaries free of IHT, from 6 April 2027 they will form part of the chargeable estate for IHT purposes.

These reforms collectively represent a significant shift away from full IHT protection for business assets, which previously qualified for 100% uncapped relief from IHT, meaning many business owners will now face increased and more complex IHT liabilities.

Shareholder protection policies, whether written into trust for the remaining shareholders or the company

Shareholder protection policies are life insurance policies which can be taken out by individual shareholders, to create a trust which identifies either the remaining shareholders or the company itself as the beneficiaries of the policy.

This allows the insurance provider to release a capital sum to the relevant beneficiary to purchase shares from critically ill or deceased shareholders. The Trust enables the beneficiary to receive the benefit quickly without the need for probate or prior payment of inheritance tax, as typically the money paid to the beneficiaries is free from inheritance tax.

The shareholders would need to adopt a legal agreement such as a cross-option agreement to run alongside the protection policy. A cross-option agreement gives call options and put options to give the beneficiary the right (but not the obligation) to purchase the deceased or incapacitated shareholder’s shares, and can give the deceased’s estate, or critically ill shareholder the right to sell their shares to the beneficiary.

Having a shareholder protection policy and cross-option agreement in place therefore has a number of benefits:

• Minimises financial strain for the company in the event of critical illness or death;
• Protects the family’s financial interests by providing the shareholder’s family with a share buy-out;
• Ensures business stability;
• Prevents unwanted external ownership; and
• Preserves Business Property Relief for inheritance tax.

Growth shares to preserve the value for future generations

Growth shares are a special class of shares which can be written into a company’s articles of association that freeze the current value of the company for the existing owners while entitling the recipients—such as children or family trusts—to all future capital growth.

Unlike ordinary shares, growth shares only begin to accrue value once your company’s worth reaches a certain valuation milestone.

In practice, when the growth shares are being created, a hurdle value is set (often the current value of your company, or slightly above it). The growth shares then entitle their holders to participate in any increase in the company’s value above this threshold. Crucially, they have no entitlement to the value below the hurdle, which remains with the existing ordinary shareholders.

This structure can effectively “ring-fence” the current value of the company for the current generation whilst gifting away the rights to future increase in your company’s value above the hurdle threshold directly to the next generation without it falling within the current generation’s estate for inheritance tax purposes.

Whilst growth shares can be an important tool in implementing succession planning arrangements, it is incredible important to get the valuation right at the outset. An incorrect valuation can lead to unexpected and potentially substantial tax charges.

Enterprise Management Incentives (EMI) options

Enterprise Management Incentives are designed to help owner managed businesses attract and retain key talent, or to ensure key talent’s continuity for future generations of the business. An EMI option enables qualifying companies to grant share options to eligible employees with significant tax advantages.

EMI options allow the company to agree the current market value of the shares from the outset, which will be paid by the employees on exercise of the option, then when the employee exercises the option to acquire the shares, the value of the shares may have substantially increased, but the purchase price of the shares will remain the same.

EMI options must be capable of being exercised within a 15 year period from the date they were granted but the terms on which they can be exercised can vary: some may be exercisable on specific milestone dates, some against performance criteria, and others only upon the sale of the business. If the options are only capable of being exercised on an exit then the existing shareholders will maintain effective control over the company despite the grant of the options.

EMI options can provide an incentive for the employee to remain with the company, ensure the success of the business or achieve key growth targets, to get the biggest discount on the purchase of their shares, and to realise substantial gains when they eventually sell their shares.

There can be significant tax advantages to EMI options, including:

• Corporate tax relief on option gains;
• There are no employer’s National Insurance contributions on option gains;
• No income tax or National Insurance on grant or exercise of market value options for employees; and
• Potential 10% tax rate on sale of the shares with Business Asset Disposal Relief.

FICs & Family Trusts

Family Trusts and Family investment companies (FICs) are central vehicles in succession planning for business owners. Both structures can facilitate the transition of value to future generations, afford asset protection, and provide flexibility over how and when beneficiaries receive wealth.

However, they differ in terms of their legal structure, tax treatment and degree of control, and understanding those distinctions is key when determining the most appropriate approach within a wider succession strategy.

Family Trust

A Family Trust is a legal arrangement where trustees hold assets, such as property, savings or investments, on trust for beneficiaries to distribute in accordance with the rules set down in the Trust Deed. It is usual for parents to set up the trust as the Settlors and Trustees, with their children and grandchildren as beneficiaries.

Depending on the Settlor’s intentions, the assets involved, and the intended beneficiaries, a range of trust structures may be used, each differing in the level of beneficiary entitlement and trustee discretion—from outright arrangements where beneficiaries have immediate rights, to flexible structures where trustees control distributions, to those providing income rights while preserving capital for others.

Family trusts offer asset protection by helping to shield wealth from external factors, whilst also allowing a degree of control over how and when assets are distributed to beneficiaries. They are a useful estate planning tool, enabling structured succession across generations and, in some cases, providing tax efficiency where arranged effectively, although the timing of creating any trust should be considered carefully alongside any other lifetime gifts to ensure the overall succession and tax position is properly managed.

Family Investment Company

There is no legal definition of a Family Investment Company (FIC).

Instead, a FIC is a UK private company used to hold and manage family investments for the long term. A FIC operates with directors, shareholders and is required to keep company accounts, the same as any other UK limited company.

A FIC allows assets to be held within a company rather than personally, so future growth can sit outside an individual’s estate and reduce overall IHT exposure.

FICs are not trading companies, instead they hold investments often in the form of cash, investments or property.

Day to day management of the FIC is carried out by the board of directors, who will usually be the founders of the company. Family members will become shareholders, with each typically holding different classes of shares which allows for varying degrees of control and entitlement to dividends.

It is also possible for a Family Trust to be a shareholder of a FIC.

The key consideration when setting up a FIC is its overarching purpose — careful thought should be given to where control will sit and how, and to whom, value will ultimately be distributed.

It is important to note the FIC will pay corporation tax on profits, rather than growth being taxed in the hands of the individual. Therefore, where profits are reinvested rather than extracted, this may allow wealth to compound more efficiently within the corporate structure.

Family Trusts versus FIC

There are clear similarities between Family Trusts and FICs, however there are important distinctions that need to be carefully assessed when considering your options.

Trusts can certainly benefit families who want a clear legal framework and trustees to act independently from beneficiaries, as well as protection for younger or vulnerable beneficiaries in complex family structures. Trusts can also offer flexibility (depending on the type of trust) and can be structured to take into account the circumstances of your beneficiaries and protect against external factors, such as creditors or divorce.

On the other hand, Family Trusts can be costly and complex to set up and run, often requiring ongoing professional advice, while reducing the Settlor’s direct control over assets. They are also subject to ongoing compliance obligations, such as registration with the Trust Registration Service and can create tax disadvantages or inflexibility if not structured carefully. Some Trusts may fall under the definition of Relevant Property Trusts, which are subject to stringent entry and exit charges as well as periodic charges every 10 years, depending on the trust value.

Careful consideration and advice should therefore be sought to ensure a Trust aligns with your objectives and your family’s circumstances.

In contrast, FICS offer both control and flexibility, allowing founders to retain power over decision‑making in the company while preserving value to family members. FICS can also provide tax efficiency, particularly through corporation tax rates which are significantly lower than the rate of IHT, and the ability to manage the timing of dividends to maximise tax benefits. FICs also support succession planning by facilitating the gradual transfer of wealth whilst keeping assets within a controlled family structure.

However, FICS can also lead to the possibility of double taxation, as profits are first subject to corporation tax within the company and then taxed again as income when distributed to shareholders as dividends. FICs are typically appropriate for individuals with significant IHT exposure, substantial capital, long‑term wealth planning, and by individuals comfortable with operating a company structure.

A middle ground?

A combined structure using both a Family Trust and a FIC can offer a balanced estate planning solution, with the Family Trust holding shares in the FIC. This allows the settlor to retain control and flexibility through the company, while the trust provides asset protection and succession planning benefits, helping to pass value to future generations in a controlled and tax‑efficient manner.

Returning value to shareholders of surplus cash

A company can hold surplus cash after achieving unexpected or significant profitability, selling part of its business or assets, or after earmarking a pool of cash or resources for a proposed strategic investment that did not materialise.

Shareholders may then wish for this surplus cash to be returned to them by way of a dividend, buyback or reduction of capital. If a shareholder is looking to retire, the other shareholders have the option to buy back the retiring shareholders shares or carry out a reduction in capital.

A share buyback is where a company acquires shares from one of their shareholders by way of cash funded from either distributable profit, by the company issuing new shares to fund the buyback through the subscription monies for the shares, or out of capital.

A reduction in capital is where a company reduces the amount of its share capital and repays the reduced amount to its shareholders. A reduction in capital can be done by way of cancelling some shares in issue, reducing the nominal value in the issued shares, cancelling the amount paid up on each share in issue or reducing a statutory reserve.

The tax position needs to be considered, and tax advice should be obtained before carrying out any return of value. No stamp duty is payable on a capital reduction; however, a company may be liable to pay stamp duty on a share buyback. The tax treatment of the amounts returned will be different for an individual shareholder than for a corporate shareholder, and you may need clearance from HMRC.

Your next move?

For further advice contact our Private Client and Corporate teams online here or call us on 0114 266 6660.