What is BPR and How Did It Work?

BPR was designed to help business owners pass their businesses to the next generation without a hefty Inheritance Tax (IHT) bill. Under the previous rules, if your company or business assets qualified, you could get up to 100% relief on their value for IHT purposes, provided you’d owned them for at least two years. This meant no IHT was due on those assets, no matter how valuable they were. For many family-run businesses, this was a game-changer, protecting their legacy from a 40% tax hit and allowing the company to remain in family hands.

The Big Changes Coming in April 2026

In October 2024 the UK government announced major updates to BPR that will come into effect in April 2026. Here’s what’s changing:

i) £1m Cap: The amount eligible for 100% relief is now capped at £1 million per person, covering both business and agricultural property combined.

ii) Tax on the Excess: For the value over £1m, relief is reduced to 50% relief, meaning that half of that excess is still taxable at the standard IHT rate of 40%. Effectively, this creates a 20% IHT rate on the value above the cap.

A Huge Hit

Let’s break this down with an example. Imagine your business is worth £15m for IHT purposes and you are the single shareholder:

i) Old Rules: With 100% BPR, no IHT would be due on the full £15m. The business assets could be passed to the next generation without an IHT bill.

ii) New Rules: The first £1m gets 100% relief (no tax). The remaining £14m gets 50% relief, so £7 million (half of £14m) is taxable. At 40% IHT, that’s a massive £2.8m tax bill.

Why This Matters

According to HMRC, UK inheritance tax receipts for this financial year had already reached £7bn at the end of January - up £0.7bn on the same period last year. If you’re a business owner - especially an owner-manager with most of your wealth tied up in your company - this change could hit hard.

Aside from tax-exempt transfers between spouses and civil partners, a death that leads to a generational transfer might leave your family needing to find a significant amount of cash to pay the IHT. The problem is that it is not uncommon for a business to be worth many times its annual free cash flow or its debt capacity. This is especially true of businesses that have high valuation multiples such as technology businesses.

It’s an extraordinarily flawed assumption that all business owners’ estates are going to be able to meet both the tax bill and retain the business. It’s almost certain that this change will force many families to sell the business, parts of it, or take on debt at what is likely already a stressful enough period in life.

The government says this makes the system fairer, targeting wealthier estates, but it’s a big shift for those relying on BPR to keep their businesses intact on death, and may have unintended consequences on the stability of many family businesses.

Trusts

Unfortunately, trusts are also affected. Each trust gets its own £1m allowance for 100% relief, but there’s a catch: for trusts set up after October 30, 2024, this allowance is split among them to stop people from creating multiple trusts to dodge the cap. Existing trusts, however, might still be used so that you can benefit from their separate allowances.

What Can You Do About It?

These changes mean estate planning is more important than ever. Here are some strategies to consider:

i) Lifetime Transfers: Gifting business assets while you’re alive could reduce the IHT burden. But beware, as if you die within seven years, the relief might be clawed back. You may also face Capital Gains Tax (CGT) on the gift which, depending on the base costs of the asset, may exceed the potential IHT. However, Gift Hold-Over Relief can be applied to defer the CGT until the business is sold in the future.

ii) Trusts: Setting up or using existing trusts could protect more of your business’s value. The rules are tricky as touched up on earlier, especially for new trusts, so professional advice is a must.

iii) Life Insurance: A policy can cover the IHT bill, sparing your family from scrambling for funds. The proceeds can pay the tax, but you’ll need to factor in the cost of premiums which, depending on the age of shareholders, could be significant.

iv) Early Disposal: Selling a business is a stressful process, and not one that benefits from a deadline like an impending tax bill. Disposing of the business early may give you more control over the process and alternative opportunities to manage your IHT exposure once you wealth is converted to cash. Additionally, this route may free your family of the burden of running a sale on following your death.

Next Steps

This isn’t happening in isolation. From April 2027, pensions will also fall into the IHT net, which could compound the tax burden for some estates. For business owners with significant assets, it’s time to rethink how you’ll pass on your wealth.

The bottom line? BPR is still a lifeline, but the new £1 million cap and 50% relief on excess value mean higher IHT bills for many. We’d strongly recommend sitting down with a tax advisor or estate planner to review your situation. They can tailor a strategy - whether it’s gifting, trusts, insurance or selling the business well ahead of time. If the plan is the latter, we can help you deliver a sale and maximise the value of the business.

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Jim Shaw is Founder & CEO of Shaw & Co

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If you'd like to discuss how Shaw & Co can help you sell, buy or fund the growth of a business, please book a meeting here

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