Business Succession and Inheritance Tax UK 2026: BPR After Finance Act 2026, Cross-Option Agreements, Employee Ownership Trusts, Business Wills, and Holdover Relief
Finance Act 2026 capped BPR at £1m — a £5m family business now faces £800k IHT on the excess. A cross-option agreement preserves the BPR that remains; keyman insurance funds the residual; a business will ensures the succession holds together.
Finance Act 2026 BPR Cap — £1m at 100%; Above £1m at 50% (20% Effective IHT)
Before April 2026: 100% BPR on any size business — zero IHT. From 6 April 2026: first £1m at 100% BPR (£0 IHT); above £1m combined BPR+APR: 50% BPR (20% effective IHT on the excess). A £5m business: £800k IHT. Fund this with keyman insurance in a cross-option trust. Review NOW if you haven't updated succession plans since the cap was announced.
| Succession Tool | How It Works | IHT Saving | Planning Notes |
|---|---|---|---|
| Business Property Relief (BPR) on death — Finance Act 2026 position | 100% BPR on qualifying unquoted trading company shares, AIM shares (treated as unquoted), business interests (partnership/LLP), and assets used in the business (s105 IHTA). 2yr minimum holding. FINANCE ACT 2026 CAP (from 6 April 2026): first £1m combined BPR+APR at 100% = £0 IHT. Above £1m: 50% BPR only = 20% effective IHT on the excess. For a business worth £3m: first £1m at 100% = £0 IHT; next £2m at 50% = £1m chargeable × 40% = £400k IHT. The £400k must be funded — instalment option; life assurance in trust; or a sale of part of the business. | PRE-FA 2026: full 100% BPR on any amount = zero IHT on the entire business. POST-FA 2026 (from April 2026): first £1m = zero IHT (100% BPR); on excess: 20% effective IHT. Large business owners must now plan for the residual IHT above £1m. The IHT is on the NET business value after BPR — so a £5m business incurs IHT of £800k (as above). This is a significant change from the pre-cap position (£0 IHT regardless of business size). | Post-FA 2026 business succession planning: (1) keyman insurance in trust to cover the residual IHT above the £1m BPR cap; (2) instalment option (ss227-235 IHTA) — up to 10 annual payments interest-free on business assets (BPR applies to reduce the IHT; instalments on the residual); (3) Employee Ownership Trust (EOT — ss236H-236U IHTA / s236H TCGA) — removes the business from the estate; CGT-free sale; avoids the FA 2026 BPR cap entirely; (4) Enterprise Management Incentive (EMI) schemes — incentivise key management to buy out the business on death (reduces the estate value via pre-agreed sale). |
| Cross-Option Agreement (Buy-Sell Agreement) — BPR preservation | A cross-option agreement between shareholders in a family company or partners in a business partnership: (a) CALL OPTION for the survivors: they may purchase the deceased's shares at market value on death; (b) PUT OPTION for the deceased's estate: the estate may sell the shares to the survivors at market value on death. Only ONE option can be exercised (the parties agree which is exercised after death). The cross-option is funded by keyman (cross-ownership) life insurance: each shareholder holds a policy on the other's life. The policy pays out on death; the proceeds fund the purchase of the deceased's shares. KEYMAN INSURANCE IN TRUST: written in a discretionary trust for the benefit of the surviving shareholders; outside the shareholder's estate for IHT; no probate delay. | BPR PRESERVATION: a cross-option agreement does NOT constitute a binding contract for sale (s113 IHTA — BPR fails if there is a binding obligation to sell before death). The cross-option has no obligation on either party — the call option is exercisable by the SURVIVORS (not the deceased); the put option is exercisable by the ESTATE (after death). HMRC accepts that this structure preserves BPR on the business shares. If instead there was a BINDING agreement for the business to be sold on death (e.g., an automatic sale provision in the partnership deed): BPR would fail under s113 IHTA — the full business value in the estate at 40% IHT. | Cross-option agreement structure: (1) formal legal deed (not just the shareholders' agreement); (2) option exercise period: typically 6 months from the date of death; (3) valuation mechanism: agreed formula or independent valuation; (4) funded by keyman insurance (each key person takes a policy on each other's life); (5) policies written in discretionary trust (outside the insured's estate); (6) reviewed annually: the sum assured should match the current business value. Post-FA 2026: the keyman insurance must cover the RESIDUAL IHT above the £1m BPR cap — not the full business value (as BPR reduces the IHT on the first £1m to nil). |
| Employee Ownership Trust (EOT — ss236H-236U IHTA; s236H TCGA 1992) | An EOT is a trust that holds shares on behalf of all employees of a trading company. The owner sells a majority interest (>50%) to the EOT. Finance Act 2014 introduced two tax incentives: (1) CGT EXEMPTION (s236H TCGA): no CGT on the gain when the controlling interest is sold to the EOT — 100% CGT relief regardless of the gain size; applies where: the selling shareholders sell a controlling interest (>50%); the company is a trading company; the company must remain employee-owned; the selling shareholders must have held the shares for ≥ 1yr. (2) EMPLOYEE INCOME TAX-FREE BONUS: employees can receive income-tax-free bonuses from the EOT of up to £3,600 per employee per year (Finance Act 2014 — reduced to £3,600 from £3,600 from 6 April 2024, having been previously unlimited — confirm current limit). IHT: the sale proceeds received by the selling shareholders are in the estate (cash or deferred consideration). However: the business no longer needs BPR — it has been sold. The sale proceeds can be invested in IHT-efficient assets (AIM portfolios for BPR; gifted as PETs; or drawn down). Finance Act 2025 changes (s235A IHTA): restrictions on the CGT relief where the seller retains a financial interest that is not consistent with the EOT purpose. | EOT: removes the business from the estate entirely (via sale). CGT: zero on the sale (s236H TCGA). IHT: the proceeds received are in the estate — but can then be IHT-planned. Avoids the FA 2026 BPR £1m cap entirely. For a business worth £5m: EOT sale → receives £5m; zero CGT; then £5m can be invested in BPR assets (AIM portfolio — within £1m cap), gifted as PETs (7yr clock), or distributed as pension (now affected by April 2027 pension IHT change). The EOT is a genuine business succession to employee ownership — not purely an IHT strategy; the employees run the business going forward. | EOT planning considerations: (1) is the owner happy with an employee-led succession? The EOT means the employees collectively own the business — the owner exits (subject to any retained role/deferred consideration). (2) Finance: the EOT may lack cash to pay the full purchase price immediately — deferred consideration over 5-10yr is common (the EOT's debt to the seller is a deductible liability of the trust). (3) The selling price must be market value — not inflated; independent valuation required. (4) The employees must be informed and consulted. (5) Governance: the EOT holds the controlling interest; employees are beneficiaries collectively (not individual shareholders); a trust board manages the EOT's shareholder role. |
| Business Will — powers for executors and specific bequests | A business succession plan must include a will that specifically addresses the business interest. Without a business-specific will: executors may face personal liability for running the business during administration; the will may not identify who receives the business (passing under residue to multiple beneficiaries — no single heir); the will may conflict with the shareholders' or partnership agreement; BPR may be lost if the will directs the business to be sold (the legatee does not receive the business — they receive sale proceeds — meaning BPR could apply to the legatee's RECEIPT of the proceeds). KEY WILL PROVISIONS FOR BUSINESS OWNERS: (1) EXECUTOR'S POWER TO CARRY ON THE BUSINESS: explicit authority in the will for executors to carry on the business during the administration period; without this, the executors can only realise assets (wind down), not continue trading; (2) SPECIFIC BEQUEST of the business interest to the named successor (child, partner, key employee); a specific bequest ensures the BPR is preserved on the recipient (not destroyed by a forced sale); (3) CONSISTENT WITH SHAREHOLDERS'/PARTNERSHIP AGREEMENT: the will must reflect the cross-option agreement; a conflict (e.g., will says 'my shares to my spouse' but the cross-option says 'survivors can purchase') causes legal dispute and potential BPR loss; (4) BUSINESS EXECUTOR: appoint a business-experienced executor (or a professional trustee) alongside the family executors. | BPR on the specific bequest: the business interest passes to the beneficiary with 100% BPR (up to FA 2026 £1m cap). If the will directs the executor to SELL the business and give the PROCEEDS to the beneficiary: the beneficiary receives cash (no BPR on cash — BPR is on the business interest, not on the cash proceeds of a sale). Specific bequest preserves BPR; residue or sale instruction does NOT. IHT saving: potentially the difference between 0% (BPR on specific bequest) and 40% (no BPR on cash proceeds) on the full business value. | Review frequency: business wills should be reviewed: after any significant change in business value (the BPR cap impact changes); after any change in ownership structure (new shareholder; exit of a partner); after any change in personal circumstances (marriage; divorce; birth of child); after any relevant tax law change (FA 2026 cap; EOT law changes). The will and the shareholders' agreement must be consistent and reviewed together — a solicitor specialising in corporate and private client work should review both simultaneously. |
| Holdover Relief — CGT deferral on lifetime gifts of business assets | Holdover relief allows business assets to be gifted in lifetime without CGT on the gain. Two forms: (1) s165 TCGA 1992: holdover relief on gifts of BUSINESS ASSETS (qualifying business assets = shares in unquoted trading companies; assets used in a qualifying trade; AIM shares meeting the conditions). The gift must be a PET (s3A IHTA) or an outright gift. The DONOR pays no CGT on the gain; the DONEE takes the donor's original base cost (held over gain). The donee pays CGT if they later sell. (2) s260 TCGA 1992: holdover relief on gifts that are CHARGEABLE TRANSFERS for IHT (CLTs — e.g., gifts into discretionary trusts). No requirement that the asset is a business asset — if the gift is a CLT (e.g., into a relevant property trust), s260 holdover is available on any asset. | s165 holdover on business assets gifted in lifetime: (1) the IHT on the PET: no IHT immediately (PET); after 7yr: fully exempt. (2) The CGT on the gift: held over — no CGT on the donor; the donee takes the donor's base cost. Combined: pass business assets to the next generation with no CGT now (held over) and no IHT (if donor survives 7yr). The donee retains the accumulated CGT gain (they pay CGT when they sell). BPR interaction: if the donor would have got 100% BPR on death anyway, the lifetime holdover gift removes the asset from the estate immediately (IHT benefit: outside estate from the date of gift, not just from death if within 2yr of purchase). However: the donee must hold the asset for 2yr to qualify for BPR on their own death (the donor's 2yr holding does not transfer to the donee — the donee's own clock starts on the date of receipt of the gift). | Holdover relief planning: (1) Business assets suitable for holdover: shares in family trading companies; assets of a family business. (2) Timing: if the business value is growing rapidly, early lifetime gifts hold over a lower gain and reduce the estate from an earlier date. (3) After the FA 2026 BPR cap: for a £5m business, BPR on the second £4m is 50% (20% effective IHT on death). Lifetime gift of the business before death: PET (7yr clock); no CGT (s165 holdover); removes the full £5m from the estate. After 7yr: zero IHT on the business. Better than the FA 2026 position (£800k IHT on the £4m excess at 50% BPR). However: the donor loses control and income from the business from the date of the gift — this is a significant personal consideration. |
Business succession IHT UK 2026. BPR: ss103-114 IHTA 1984. s105(1)(a): business or interest in a business; 100% BPR. s105(1)(b): quoted shares with control (≥50%); 50% BPR. s105(1)(bb): unquoted shares (including AIM); 100% BPR. s106 IHTA: 2yr minimum holding. s107: replacement property. s108: associated operations. s110: net asset valuation for partnership. s112: excepted assets — assets not used in the business excluded from BPR (excess cash, investment properties within the company structure). s113 IHTA: BPR fails where there is a binding contract for sale of the property. HMRC clarification on cross-option agreements: HMRC Technical Manual IHTM25291 — a cross-option agreement where both a put and call option exist (but only one can be exercised) is NOT a binding contract for sale; BPR is not denied. Binding pre-death agreement: if the deceased SIGNED an agreement before death obligating them to sell — BPR fails. Finance Act 2026: combined BPR + APR cap £1m at 100% (Royal Assent anticipated; Budget 2024 announced; Finance Bill 2025-26 enacted). Above £1m: 50% relief rate; effective IHT 20% on excess. Instalment option: ss227-235 IHTA — business assets qualify; interest-free instalments on business assets if instalments paid on time; 10 annual instalments; election on IHT400 box 85. Keyman insurance (cross-ownership): each shareholder holds a policy on each other's life; policies typically discretionary trusts (to keep proceeds outside each insured's estate); sum assured = market value of shares at estimated death; review annually as business grows. Post-FA 2026: sum assured on keyman insurance = the residual IHT above £1m BPR cap (not the full business value — BPR still eliminates the first £1m). EOT: ss236H-236U IHTA 1984 inserted by Finance Act 2014; CGT exemption: s236H TCGA 1992 (Finance Act 2014); qualifying criteria: selling shareholders sell ≥50.1% to EOT; EOT is a UK trust; company is a trading company; shareholding conditions met. Finance Act 2025 restrictions on EOT: anti-avoidance — if the seller receives consideration above market value or maintains a financial interest inconsistent with the EOT purpose, the CGT exemption may be denied. Employee income-tax-free bonus: s312A-312G ITEPA 2003 — employees of EOT-owned companies can receive up to £3,600 pa income-tax-free; applies only to companies that are employee-owned (EOT holds majority); Finance Act 2023 extended the rule; Finance Act 2024 increased the threshold (confirm current limit). Holdover relief: s165 TCGA 1992 — gifts of qualifying business assets; requires the asset to be a qualifying business property (shares in unquoted trading companies, assets used in trade); holdover means the donor's gain is not charged on the donor; the donee's acquisition cost = donor's original base cost + any gain not held over; joint election on HMRC Form HS295. s260 TCGA — holdover on CLTs; any asset; available regardless of business asset status if the gift is a CLT. Anti-avoidance: s165 holdover is not available where the gift is to a settlor-interested trust; s260 holdover available on CLTs including settlor-interested relevant property trusts. Entrepreneurs' Relief (now Business Asset Disposal Relief — BADR): Finance Act 2020; if business is sold in lifetime (not gifted), BADR applies at 10% CGT on qualifying business assets (up to £1m lifetime limit); for EOT: CGT rate on the gain above £1m (if holdover not available and EOT CGT relief not taken) = 18%/24% (depending on rate in force). Business Will and executors: Trustee Act 1925 s57 — court can authorise acts not within the trustee/executor's powers; a will giving express power to carry on the business is preferable; Wills Act 1837; Administration of Estates Act 1925 — executors' duties include preserving and administering the estate; ongoing trading during administration requires express power in the will or court authorisation. Partnership agreements: Partnership Act 1890 — on death of a partner, the partnership is technically dissolved unless the agreement provides otherwise; a partnership agreement with continuation provisions is essential for business succession.
Frequently Asked Questions
How much inheritance tax do I pay on a family business after Finance Act 2026?
Finance Act 2026 introduced a combined BPR and APR cap of £1m at the 100% rate, effective from 6 April 2026. For a family business: the first £1m of combined BPR and APR qualifying assets attracts 100% relief (zero IHT). Above £1m: 50% BPR only — effective IHT rate of 20% on the excess. Example: family business worth £5m; NRB £325k (assume used elsewhere). BPR: first £1m at 100% (£0 IHT); next £4m at 50% BPR = £2m chargeable × 40% = £800k IHT. Pre-cap position (before April 2026): 100% BPR on the full £5m = £0 IHT. The instalment option (ss227-235 IHTA) allows this £800k to be paid over 10 annual instalments (£80k pa) — interest-free for qualifying business assets. For businesses significantly above £1m: keyman insurance to cover the residual IHT, or an Employee Ownership Trust (EOT) sale to avoid the cap entirely, are important planning considerations.
What is a cross-option agreement and how does it preserve Business Property Relief?
A cross-option agreement (also called a buy-sell agreement) is a legal arrangement between business co-owners. It gives: (a) the SURVIVING co-owners a CALL OPTION to purchase the deceased's business interest at market value; AND (b) the DECEASED's estate a PUT OPTION to sell the business interest to the survivors at market value. Only one option can be exercised — the parties agree after death. The cross-option is funded by keyman insurance: each co-owner holds a life policy on the others' lives, written in a discretionary trust. WHY IT PRESERVES BPR: s113 IHTA 1984 provides that BPR fails if the deceased's interest was 'subject to a binding contract for sale' at the date of death. A true cross-option agreement (where neither party is bound until they choose to exercise their option after death) does NOT constitute a binding contract for sale. HMRC accepts that a properly structured cross-option preserves BPR. A simple binding pre-death agreement to sell the business WOULD fail BPR under s113 IHTA — causing the full business value to be in the estate at 40% IHT. The cross-option protects the BPR while ensuring the business can pass smoothly to the survivors.
What is an Employee Ownership Trust and does it save inheritance tax?
An Employee Ownership Trust (EOT) is a trust that holds a controlling interest (>50%) in a trading company on behalf of all employees. Finance Act 2014 introduced a CGT exemption on the sale of shares to an EOT (s236H TCGA): no CGT on the gain when the owner sells a controlling interest to the EOT. IHT impact: the sale removes the business from the owner's estate. The sale proceeds (cash received) are in the estate but can then be IHT-planned (invested in BPR assets within the £1m cap; gifted as PETs; etc.). For business owners facing a large IHT bill from the Finance Act 2026 BPR cap: an EOT sale avoids the cap entirely — the business is sold (not passing on death) so BPR is irrelevant; the CGT-free proceeds can be invested in other IHT-efficient assets. Employee bonus: employees can receive up to £3,600 pa income-tax-free from the EOT post-sale. The EOT is genuinely an employee succession vehicle — it is not just an IHT strategy. The owner must be comfortable transferring control to the employees.
What should a business owner's will include for inheritance tax planning?
A business will should include: (1) EXECUTOR'S POWER TO CARRY ON THE BUSINESS: explicit authority for executors to continue the business during the administration period (without this, executors may not be able to trade — they can only realise assets). (2) SPECIFIC BEQUEST of the business interest: name the successor specifically — do NOT leave the business in residue or direct it to be sold. A specific bequest of business shares preserves BPR on the bequest (100% BPR on the first £1m; 50% on excess). If the will directs a SALE, the legatee receives cash — no BPR on cash. (3) CONSISTENCY WITH SHAREHOLDERS'/PARTNERSHIP AGREEMENT: the will and the cross-option agreement must align — a conflict causes legal disputes and can invalidate the succession plan. (4) BUSINESS-EXPERIENCED EXECUTOR: appoint a corporate/business-familiar executor (solicitor or accountant) alongside family executors. (5) INSTALMENT OPTION DIRECTION: if the estate will use the IHT instalment option (10yr instalments on business assets — ss227-235 IHTA), the will can note the executors' intention to elect this — though the formal election is on IHT400. Review the business will whenever the business value changes, ownership changes, or tax law changes (as with the Finance Act 2026 BPR cap).
What is holdover relief and how does it help with business succession?
Holdover relief (s165 TCGA 1992 and s260 TCGA 1992) allows business assets to be gifted in lifetime without the donor paying CGT on the accrued gain. The gain is 'held over' — deferred to the recipient, who takes the donor's original base cost and pays CGT when they eventually sell. s165 holdover: applies to gifts of qualifying business assets (shares in unquoted trading companies; assets used in a trade) that are PETs for IHT (gifts to individuals). s260 holdover: applies to gifts that are CLTs (chargeable lifetime transfers — e.g., gifts into discretionary trusts); no requirement that the asset is a business asset. Combined IHT and CGT benefits: gift business assets to the next generation in lifetime; no CGT (s165 holdover); no IHT immediately (PET); after 7yr: PET exempt (fully outside the estate). The donee takes the business with the deferred CGT base cost — they pay CGT when they eventually sell or pass on the business. Post-FA 2026 BPR cap context: for a £5m business, lifetime holdover gifting avoids the 20% effective IHT on the £4m excess above the £1m cap (saving £800k IHT after 7yr PET survival). But the donor loses control and income from the date of the gift — a significant personal and commercial consideration.
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