Investments that qualify for Business Relief (BR) are front of mind for many financial advisers following the Autumn Budget.
This is not only being driven by a desire to review clients with existing BR assets following the changes to BR that were announced and take effect in 2026, but by changes to inheritance tax on pensions, which requires a rethink of how best to plan for many estates.
In fact, a webinar Octopus hosted in November, watched by more than 1,000 advisers, revealed more than two thirds of attendees who responded to a poll were either considering BR for their clients for the first time, or considering it for more of their clients following the changes to inheritance tax and BR.
As with any change to legislation, especially in an area as complex as estate planning, it’s easy for misinformation and confusion to come into play. So, I thought I’d clarify exactly what’s changed for BR and clear up some of the misconceptions that I’ve come across.
As with any change to legislation, it’s easy for misinformation and confusion to come into play
While the legislation for the new rules has yet to be issued, and some specific details will be subject to consultation, the Budget has provided more certainty around inheritance tax than has been present (at least in press speculation) over the last 18 months.
The fundamentals
BR is a longstanding relief from inheritance tax that enables investments in qualifying companies to be passed free from inheritance tax, provided they have been held for two years when the investor dies.
Where an investor owns qualifying shares and dies prior to 6 April 2026, there will be no changes. For deaths occurring after then, the following applies:
1. A new “Individual lifetime Business Relief allowance” of £1m per investor is being introduced. This covers investments in unquoted companies, any sole traderships, partnerships and agricultural property. Qualifying investments within this limit will continue to benefit from 100% relief from inheritance tax.
2. Investments above the £1m individual allowance will attract 50% rather than 100% relief from inheritance tax (i.e. an effective 20% inheritance tax rate will apply).
3. The rate of relief that applies to qualifying AIM-listed shares will be 50% (i.e. an effective 20% inheritance tax rate will apply). Such shares will no longer qualify for 100% relief from inheritance tax.
There is no upper limit to the amount an individual can invest into unquoted or AIM-listed shares while qualifying for 50% relief.
What about lifetime gifts and trusts involving BR qualifying investments?
If BR-qualifying investments are gifted to a beneficiary during the investor’s lifetime, they are a potentially exempt transfer (PET) like other lifetime gifts. If the settlor survives for seven years, the gift is out of scope for inheritance tax. If not, provided the beneficiary still owns BR-qualifying shares, 100% relief from the inheritance tax charge should be available.
If BR-qualifying investments are gifted to a beneficiary during the investor’s lifetime, they are a potentially exempt transfer like other lifetime gifts
Similarly, if BR-qualifying shares are settled into a discretionary trust, the benefit of 100% relief applies to the chargeable lifetime transfer charge on entry (typically 20%). If the settlor survives for seven years, the settlement is out of scope for inheritance tax. If not, provided the trust still owns BR-qualifying shares, the top up charge to inheritance tax that would otherwise arise benefits from 100% relief.
Under the new rules, lifetime gifts will utilise the £1m Individual Allowance if the donor doesn’t survive for seven years after making the gift and dies after 6 April 2026. If they do survive for more than seven years, the allowance will not have been utilised – the gift is simply a “successful PET”.
Gifts into trust made after 6 April 2026 will also utilise the £1m Individual Allowance on settlement.
Is planning possible before the new rules take effect?
Anti-forestalling measures were included in the Budget. These are designed to ensure any planning put in place following the Budget cannot frustrate the intention of the new rules. As a result, lifetime gifts made between the Budget and 5 April 2026 will be subject to tax as above (assuming the donor dies after 6 April 2026).
It seems possible, from the examples given in the Budget, that BR shares to an unlimited value could be settled into trust prior to 6 April 2026 while benefitting from 100% relief from inheritance tax. If the settlor dies within seven years of making the settlement (and after 6 April 2026) the examples show that the £1m allowance would be relevant. Clients with significant BR-qualifying investments might benefit from considering lifetime trust planning over the next 18 months.
The announcement was silent about the position for gifts made prior to the Budget or trusts settled ahead of the Budget. It is possible they will simply fall under the original rules.
Married couples
Taken together, a married couple has a combined Individual Business Relief Allowance of £2m, which they can use to leave qualifying assets completely free from inheritance tax.
However, unlike the NRB and RNRB, the Individual Business Relief Allowance is not transferable. Each spouse must use their own allowance to prevent it being lost on death. That means that married couples with an excess of £1m invested in qualifying shares should consider lifetime planning to maximise their allowances.
Holding joint portfolios may not be attractive to such clients, where the second spouse must inherit the entire portfolio on the first death. And making lifetime gifts between spouses to ensure neither spouse holds more than £1m of assets (as far as possible) is likely to be attractive.
Business Relief and pension planning
The most impactful change in the Budget for many clients was the announcement that defined contribution pension pots will be included in the estate for inheritance tax for deaths after 6 April 2027. Some of the practicalities of this wide-reaching change will be subject to a consultation to be launched in the new year.
Most other taxes applied to pensions on death are not changing If a pension is left to a spouse, it will continue to pass free from inheritance tax. The income tax treatment of pensions is not changing. This means:
- 25% of the pot (to a typical maximum of £268,000) can be withdrawn tax free by the pension owner. Withdrawals above this amount will be subject to income tax at the investor’s marginal rate.
- Pensions inherited from someone who dies younger than 75 can be drawn by beneficiaries free from income tax.
- Pensions inherited from someone who dies older than 75 will be subject to income tax as drawn at the beneficiary’s marginal rate.
It’s expected pensions will form part of the estate for considering whether the residence nil-rate band (RNRB) can be claimed. This allowance is tapered away for estates worth more than £2m. More estates will now be at risk of losing some or all of this allowance.
Sound planning may now centre around taking the tax-free lump sum and using it to undertake inheritance tax planning
As a result, the undrawn pension pot of someone who dies aged over 75 risks being subject to an effective inheritance tax rate exceeding 80%. This is expected to result in a significant change in approach to estate planning, and the role pensions should play when planning for clients.
Sound planning may now centre around taking the tax-free lump sum and using it to undertake inheritance tax planning. Making regular gifts from pension drawdown should be an inheritance-tax-efficient set up, or simply returning to the pension as a means to fund lifetime expenditure, freeing up other capital to undertake planning.
Provided a client is suitable, you may want to discuss BR as an option. Using non-pension capital to make a qualifying investment can return a client to an inheritance-tax-efficient position after two years, while also enabling access to capital should it be needed.
Start exploring estate planning in 2025
Understandably, many will want to wait until the specifics of the new legislation are fully drafted to review their estate plans. Regardless, it’s likely clients will have questions and want to start discussing their options with you now. It makes sense to work with providers to explore solutions and potential planning over the coming months.
Jess Franks is head of investment products at Octopus Investments
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