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  • Protecting Legacy and Livelihood: Navigating the Challenges of Inheritance Tax for Small Family Businesses

March 25, 2024

Do you pay inheritance tax on a business? Yes, you absolutely do.

In small family businesses, preserving both the business and livelihood is a big challenge, especially in the face of inheritance tax (IHT). This area of financial planning needs careful consideration to ensure that the business and the fruits of the labour are protected for future generations.

In this article, we will look at the complex issue of tax on inheritances for small family businesses. We will offer insights and strategies to help business owners and their beneficiaries manage inheritance tax liability.

Understanding Inheritance Tax and Its Implications for Small Family Businesses
Discussing inventory

Inheritance Tax (IHT) in the United Kingdom is a tax on the estate (the property, money and possessions) of someone who has passed away.

For small family businesses, IHT can be a big threat. It puts the continuity and the preservation of the business at risk, as tax liabilities may force the sale of the business/parts of the business to meet the inheritance tax bill.

Understanding the nuances of IHT, including who is liable, what is taxed and at what rate, is crucial for effective IHT planning.

The current IHT threshold, tax rate or ‘nil-rate band’, is £325,000 for an individual, with anything above this amount taxed at 40%. However, there are reliefs and exemptions that small businesses can take advantage of. For example, Business Property Relief (BPR) can reduce the value of the business or its assets for IHT purposes. Often, it can be reduced to zero, meaning it can be passed down tax-free.

Strategies for IHT Planning and Wealth Management

Utilising Business Property Relief (BPR)

BPR is a key player in mitigating inheritance tax (IHT) on business assets, making it indispensable for small family businesses keen on preserving their legacy. To use BPR effectively, the business must primarily engage in trading activities rather than investment ventures, with the prerequisite that the assets have been held by the deceased for no less than two years before their death.

A thorough understanding of the details, as well as some strategic planning, can help businesses benefit from BPR, hugely reducing their IHT obligations.

Gifting and Succession Planning

Gifting and succession planning is another strategic way for businesses to reduce their IHT liabilities.

Choosing to gift parts of the business while the owner is still alive, especially when these gifts occur more than seven years before the donor’s passing, can exempt these transfers from IHT. This makes gifting and succession planning a good strategy for wealth and business ownership transition, helping avoid hefty tax liabilities. This approach requires careful planning and the help of a financial professional to navigate tax regulations and maximise tax advantages.

Life Insurance Policies

Life insurance policies are another important area when it comes to managing IHT liabilities.

Establishing policies within a trust can direct payouts straight to beneficiaries, avoiding the estate and avoiding IHT. This approach provides peace of mind. It offers the knowledge that financial plans have been made to protect the business’s future and support the beneficiaries, helping them avoid the burden of unexpected tax liabilities.

Investment in IHT- Efficient Assets

Investing in IHT-efficient assets, such as selected AIM (Alternative Investment Market) shares eligible for BPR, offers a good strategy to limit potential IHT charges.

This method relies on careful and considered investment choices and precise timing to guarantee that the assets qualify for relief upon the owner’s death. Diversifying investments into IHT-efficient assets can also spread risk and potentially enhance returns by aligning the business’s growth strategy with tax efficiency practices. 

Speaking with financial advisors who specialise in IHT planning is essential for making informed decisions that maximise the benefits of these investments over time.

Estate Planning and Tax Considerations

Comprehensive estate planning is also essential for managing IHT liabilities. This process involves creating a will that clearly explains how business assets and every part of your estate should be distributed. This helps avoid ambiguity and potential legal complications.

Utilising trusts is a strategy to manage how assets are passed on to beneficiaries, allowing for a controlled and tax-efficient transfer of wealth. In certain situations, it may also be wise to think about restructuring the business to maximise tax efficiencies, which can significantly reduce the taxable estate’s value.

Capital gain taxes, gift taxes, and estate taxes also need to be considered during IHT planning. Each of these taxes has an impact, so a considered approach is essential.

For example, the residence nil rate band offers a good opportunity to add allowance to the estate for homes passed on to direct beneficiaries. This can significantly decrease the IHT liability. Understanding and making use of these tax considerations is key to creating a robust estate plan that ensures the assets of a family business are protected and passed on with minimal tax burden.

The Role of Financial Advisors in IHT Wealth Management
Financial advisor

Navigating IHT (Inheritance Tax) requires a detailed understanding of tax laws, available reliefs and expert strategic financial planning. It’s not quite as easy as simple tax returns at the end of the tax year.

That’s why a financial advisor is so important. They are armed with expertise in IHT wealth management and estate planning. These professionals can offer guidance, creating bespoke strategies to minimise IHT liabilities effectively.

Financial advisors play a crucial role in helping clients navigate IHT. They ensure wealth is preserved and passed down to future generations in the most tax-efficient manner possible. By using their knowledge and experience, financial advisors can help individuals and businesses implement a comprehensive IHT wealth management strategy.

Financial advisors can evaluate a business’s market value, pinpointing potential IHT liabilities and identifying the most effective strategy for mitigation.

Their value goes beyond initial planning. They offer constant support in implementing these strategies, ensuring adherence to tax laws and adjusting to any changes in the business.

Furthermore, they can facilitate discussions on sensitive topics such as succession planning. They can mediate between family members and ensure that the business transitions smoothly from one generation to the next.

By encouraging a proactive approach to IHT planning, financial advisors help business owners safeguard their legacy. They also help protect the success and stability of the business in the future. Their guidance is essential when navigating IHT, turning potential financial problems into opportunities for growth.


Protecting the legacy and livelihood of small family businesses in the face of IHT is a big challenge, but it’s not impossible.

With careful planning, strategic use of reliefs and exemptions and professional advice, navigating this complex tax issue is possible. By doing so, business owners and their beneficiaries can safeguard their business for future generations.


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