IHT for Company Directors UK: Inheritance Tax on Limited Company Shares, Director's Loans, and Business Assets (2026)
Shares in a qualifying unquoted trading company attract 100% BPR under s105(1)(bb) IHTA 1984 — reducing their IHT value to nil. But the director's loan account gets no BPR. Death-in-service lump sums via discretionary trust schemes fall outside the estate. From April 2026, the £1m combined BPR/APR cap applies.
| Asset | BPR Available? | Notes |
|---|---|---|
| Shares in own unquoted trading company | 100% | s105(1)(bb); 2yr ownership; £1m cap April 2026 |
| Director's loan account (credit) | None | Estate asset at face value — not a business shareholding |
| Excess cash in company (above working capital) | None | Excepted asset under s112 IHTA 1984 |
| Death-in-service (discretionary trust scheme) | N/A | Outside estate if paid to trust — no IHT at all |
| Shares in company holding mainly investment property | None | Investment company fails s105(3) trading test |
| EMI / unapproved options (unvested at death) | Variable | Depends on scheme rules; specialist advice required |
IHT Planning for Company Directors
BPR on shares in a director's own limited company
Where a company director owns shares in an unquoted limited company that carries on a qualifying trading business, those shares qualify for 100% Business Property Relief under s105(1)(bb) IHTA 1984. 'Unquoted' means not listed on a recognised stock exchange — shares in a private limited company (Ltd) are unquoted for this purpose. AIM-listed shares are also unquoted for BPR. The qualifying conditions are identical to those for other unquoted shares: (1) The company must be a trading company — not 'wholly or mainly' making or holding investments. A company that provides IT consultancy, accountancy, legal services, marketing, manufacturing, retail, or any genuine trade qualifies. A company that mainly holds and lets investment property does not. (2) The director must have owned the shares for at least two years immediately before death. (3) The company must be a going concern at the date of death. Where all conditions are met, the value of the director's shares is reduced to nil for IHT purposes (subject to the £1m cap from April 2026). For a director who owns 100% of a company valued at £800,000, this means no IHT on the shares — a saving of up to £320,000 compared with an estate with no BPR.
The director's loan account: no BPR, full IHT
A director's loan account (DLA) is a balance owed by the company to the director — representing funds the director has lent to the company, undrawn salary or dividends, or other amounts the company owes. A credit director's loan account (where the company owes the director) is an asset of the director's estate — it is a debt owed to the director by the company. Unlike the shares, the DLA does not attract BPR under s105(1)(bb) — BPR applies to the shares in the business, not to loans made to the company. The DLA balance is included in the estate at full face value and charged to IHT at 40% above the NRB. Example: a director owns 100% of a trading company valued at £500,000 (BPR: nil IHT on shares) and has a director's loan account of £200,000. IHT on the shares: nil (100% BPR). IHT on the DLA: £200,000 minus NRB (if remaining) = charged at 40%. The DLA is often overlooked in estate planning — directors who have accumulated large DLA balances should consider: repaying the DLA before death (reducing the estate); converting the DLA into share capital (so it becomes part of the shares — which attract BPR); or drawing the DLA as salary or dividends and gifting the cash (subject to PET rules and income tax on the drawing).
Death-in-service life insurance: usually outside the estate
Many directors participate in a group life insurance (death-in-service) scheme provided by the company — typically paying a lump sum of 2× to 5× salary on death. Where the death-in-service scheme is structured as a discretionary trust (which most employer schemes are), the lump sum is paid to the trustees of the scheme — not to the estate. The trustees exercise their discretion to pay beneficiaries named in an expression of wishes. Because the lump sum is paid to the trustees (not the estate), it does not form part of the IHT estate. This is a significant benefit: a £500,000 death-in-service lump sum paid via a discretionary trust scheme falls entirely outside the estate and can fund the family's immediate needs — or, if structured correctly, help fund any IHT liability on the estate's other assets. Directors should: keep their expression of wishes current (update after marriage, divorce, or birth of children); ensure the scheme is genuinely structured as a discretionary trust (most group life schemes are); be aware that employer-sponsored schemes operated by insurance companies are typically registered pension schemes under which the lump sum may be treated as an authorised pension benefit — reinforcing its outside-estate status.
Cross-option agreements for director-shareholders
Where a company has multiple shareholders (for example, two or more directors who own the company jointly), a cross-option agreement provides a mechanism for the deceased director's estate to sell the shares to the surviving directors — without creating a binding contract that would defeat BPR. Under the cross-option: the deceased's estate has the option to sell the shares to the surviving shareholders; the surviving shareholders have the option to buy the shares from the estate. Each option is exercisable independently — ensuring that no binding obligation to buy/sell exists before death (which would cause the shares to be valued as subject to contract under s113 IHTA 1984, potentially defeating BPR). The purchase price is fixed by a pre-agreed formula (often based on the most recent set of accounts, or an independent valuation). Life insurance is placed on each director's life (funded by the company or the other directors) to provide the cash for the buy-out. The company's articles of association may also contain pre-emption rights on share transfers — these should be reviewed to ensure they do not inadvertently create a binding obligation that defeats BPR.
Personal service companies and contractor directors
Many contractors and IT professionals operate through a personal service company (PSC) — a one-person limited company through which they invoice their clients. For BPR purposes, the key question is whether the PSC carries on a qualifying trade. A PSC that provides genuine professional services to clients through the company (outside of IR35) should qualify as a trading company for BPR purposes. However, HMRC may challenge a PSC's trading status in the following circumstances: if the PSC is mainly in a single long-term contract that amounts to disguised employment (IR35 caught); if the PSC holds mainly cash and investment assets rather than actively trading; if the director has retired from trading but the PSC remains nominally in existence. A director who operates a genuine trade through their PSC, has actively traded for two or more years, and the PSC has limited non-trading assets should be able to claim BPR on the PSC shares. However, the PSC structure is often wound up on retirement — in which case there is no BPR claim (the company ceases to be a going concern). Directors who intend to retain the PSC after winding down trading should take specific advice on whether the shares remain qualifying property.
Excess cash and the excepted assets trap for company directors
A common issue for successful directors is accumulation of cash within the company — retained profits not needed for immediate trading purposes. Where the company holds excess cash beyond its working capital requirements, HMRC will apply the excepted assets rules under s112 IHTA 1984: assets not used in the business and not required for its future use are excluded from BPR. The share value is apportioned: the portion attributable to trading assets attracts BPR; the portion attributable to excepted assets does not. A company worth £1m of which £400,000 is excess cash would see BPR on £600,000 (trading assets) and full IHT on the £400,000 excepted cash element (within the shares' value). Remedy: regularly extract excess cash as dividends (taxable as income — rate approximately 33.75% for higher-rate taxpayers), salary, or pension contributions; or invest the cash in genuine business assets (equipment, working capital, business premises used in the trade). A pension contribution by the company for the director's benefit is tax-deductible for the company, reduces the excess cash within the company, and builds pension assets which (at present) are outside the IHT estate.
The April 2026 BPR cap and planning for directors
From 6 April 2026, the combined amount of BPR and APR qualifying for 100% relief is capped at £1,000,000 per person (£2,000,000 for a couple using the transferable equivalent). Above the cap, only 50% relief applies — effective IHT rate of 20% on the excess. For directors of growing companies, this is increasingly likely to be relevant. A director who owns 100% of a company worth £2m would face: £1m at 100% BPR (nil IHT) + £1m at 50% BPR — IHT of 40% × £500,000 = £200,000. Planning options before April 2026: gift a portion of the shares to a spouse now (using the inter-spousal CGT no-gain/no-loss rule) so each holds up to £1m of qualifying shares; begin a PET of shares to the next generation (7-year clock starts); arrange life insurance in trust to fund the above-cap IHT liability; consider a management buy-out or sale of the company before death (which removes the shares from the estate entirely — though CGT and BADR may apply).
Frequently Asked Questions
Do shares in my own limited company qualify for Business Property Relief to reduce IHT?
Yes, if the company is a qualifying trading company. Shares in an unquoted trading limited company qualify for 100% BPR under s105(1)(bb) IHTA 1984 — reducing their IHT value to nil. Conditions: (1) the company must be 'wholly or mainly' trading (not investment); (2) you must have owned the shares for at least two years before death; (3) the company must be a going concern. From April 2026, 100% BPR is capped at £1m per person — above that, only 50% BPR applies (effective 20% IHT rate).
Is a director's loan account subject to inheritance tax?
Yes. A credit director's loan account (where the company owes money to the director) is an asset of the director's estate and is included at full face value for IHT. Unlike the company shares, the DLA does not attract BPR — it is a loan, not a shareholding in a trading business. IHT is charged at 40% on the DLA balance above the NRB. Options: repay the DLA before death; convert it to share capital (which may attract BPR); or draw it as salary/dividends and gift the cash (PET rules apply).
Is death-in-service life insurance through my company subject to IHT?
Generally no, provided the scheme is structured as a discretionary trust. Most employer group life schemes pay a lump sum to the trustees of a discretionary scheme rather than to the estate — so the payout falls outside the IHT estate entirely. Directors should keep their expression of wishes current (naming spouse, children) so the trustees have clear guidance. Benefits paid directly to the estate (not via a trust) would be included in IHT.
What is a cross-option agreement and why do directors need one?
A cross-option agreement lets the deceased director's estate sell their shares to surviving shareholders, and lets surviving shareholders buy the shares — without creating a binding pre-death obligation (which would defeat BPR under s113 IHTA 1984). Each option is independent and exercisable only after death. Life insurance funds the purchase price. This is essential for multi-director companies: without it, the estate may be forced to sell shares to third parties or leave them stranded in the company, causing disputes and potentially triggering IHT.
How does excess cash in my company affect BPR?
Excess cash beyond the company's working capital requirements is an 'excepted asset' under s112 IHTA 1984 and is excluded from BPR. The share value is apportioned: the trading portion attracts 100% BPR; the excess cash portion is fully taxed. A company worth £800k with £300k excess cash would see BPR on £500k only — IHT of 40% × £300k = £120,000 on the excepted element. Remedy: extract excess cash as dividends, make company pension contributions, or invest in genuine trading assets before death.
Your Business Needs a Plan — So Does Your Will
A director's will must address what happens to the company shares — who inherits, whether a cross-option applies, how any IHT above the BPR cap is funded. Without a clear will and up-to-date expression of wishes for your death-in-service scheme, your estate can be left with an unexpected IHT bill and no plan to pay it. WillSafe will kits for England and Wales provide the legal foundation.
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