Inheritance tax (IHT) is one of those topics that most business owners know they should think about but keep pushing to the bottom of the pile. It feels distant, morbid, and complicated. But the reality is that without proper planning, IHT can take a 40% bite out of the value you’ve spent decades building.
For Northern Ireland business owners, this is particularly relevant. NI has a high proportion of family businesses, a significant agricultural sector, and a culture of passing businesses down through generations. The 2025 Autumn Budget introduced changes that make planning even more urgent.
This guide covers the IHT basics, explains Business Property Relief (BPR), sets out what’s changing from April 2026, and outlines the planning strategies you should be discussing with your accountant.
IHT basics: what you need to know
Inheritance tax is charged on the value of your estate when you die (and on certain lifetime transfers). Here are the key numbers for 2025/26:
| Threshold / Rate | Amount |
|---|---|
| Nil rate band (NRB) | £325,000 |
| Residence nil rate band (RNRB) | £175,000 |
| Combined nil rate bands (individual) | £500,000 |
| Combined nil rate bands (married couple/civil partners) | £1,000,000 |
| IHT rate on the excess | 40% |
The nil rate band is the amount you can pass on tax-free. It’s been frozen at £325,000 since 2009, and it’s now confirmed as remaining frozen until at least April 2030. That’s over two decades without an increase, while asset values, particularly property and business values, have risen substantially.
The residence nil rate band adds an extra £175,000 if you’re leaving your main home to direct descendants (children, grandchildren). A married couple can combine their allowances, giving a potential £1 million IHT-free transfer. But the RNRB starts to taper away if the total estate exceeds £2 million.
Key point: If your estate is worth more than your available nil rate bands, the excess is taxed at 40%. For a business owner whose company is worth £2 million, that’s a potential IHT bill of hundreds of thousands of pounds. This is why Business Property Relief matters so much.
Business Property Relief: the cornerstone of IHT planning
Business Property Relief is the single most important IHT relief for business owners. When it applies, it can reduce the taxable value of business assets by up to 100%, effectively eliminating the IHT charge on those assets.
Here’s how it works:
100% relief applies to:
- A business or interest in a business (sole trader or partnership)
- Shares in an unlisted trading company (including AIM-listed shares)
50% relief applies to:
- Land, buildings, or machinery owned by a partner or controlling shareholder and used in the business
- Shares in a listed trading company where you control more than 50%
To qualify for BPR, you must have owned the business asset for at least two years at the date of death (or the date of a lifetime transfer into a trust).
What qualifies as a trading business
BPR is available for “relevant business property,” which essentially means businesses that are genuinely trading. HMRC looks at whether the business is primarily a trading business rather than an investment business.
Activities that count as trading include: providing goods or services, manufacturing, construction, professional services, retail, hospitality, and most operational businesses.
Activities that don’t count include: holding investments, letting property (in most cases), holding shares in other companies as passive investments, and managing a portfolio.
What doesn’t qualify
Several categories of asset are excluded from BPR, even if they’re held within an otherwise qualifying business:
| Qualifying for BPR | Not qualifying for BPR |
|---|---|
| Trading company shares (unlisted) | Investment company shares |
| Sole trader business assets | Buy-to-let property portfolios |
| Partnership interests (trading) | Cash or investments not needed for trading |
| Goodwill, stock, debtors | Excepted assets (assets not used in the business) |
| Plant and machinery | Land held as an investment |
| AIM-listed shares | Listed shares (unless 50%+ control) |
Excepted assets are a particular trap. If your trading company holds significant cash or investments that aren’t needed for trading purposes, HMRC can argue that those assets don’t qualify for BPR. For example, if your company has £500,000 sitting in a deposit account with no clear business purpose, that cash could be treated as an excepted asset and excluded from BPR.
Hybrid businesses are another grey area. If your company carries on both trading and investment activities, HMRC will look at the overall character of the business. If the investment element is “substantial” (broadly, more than 20% of the total activity by any measure), the whole business could lose its BPR qualification. This is one of the most litigated areas of IHT law.
Warning: The “wholly or mainly trading” test is applied at the date of death. You can’t clean things up retrospectively. If your company has drifted towards investment activity over the years, you need to address it now.
The 2025 Budget changes: what’s new from April 2026
The Autumn Budget 2025 introduced the most significant change to BPR and Agricultural Property Relief (APR) in decades. From 6 April 2026:
- The combined value of business and agricultural property qualifying for 100% relief will be capped at £1 million per individual.
- Business and agricultural property above the £1 million cap will qualify for relief at 50% (not 100%).
- This means the effective IHT rate on business/agricultural property above £1 million will be 20% (40% rate, halved by the 50% relief).
To put this in concrete terms:
| Business value | BPR (pre-April 2026) | BPR (from April 2026) | IHT payable (from April 2026) |
|---|---|---|---|
| £500,000 | 100% (nil IHT) | 100% (nil IHT) | £0 |
| £1,000,000 | 100% (nil IHT) | 100% (nil IHT) | £0 |
| £2,000,000 | 100% (nil IHT) | 100% on first £1M; 50% on next £1M | £200,000 |
| £5,000,000 | 100% (nil IHT) | 100% on first £1M; 50% on next £4M | £800,000 |
This is a fundamental shift. Before April 2026, a business owner could pass on a trading company worth £10 million completely free of IHT (assuming BPR applied). From April 2026, the same business would generate an IHT liability of £1.8 million. That’s a planning earthquake for family businesses.
The £1 million cap applies per individual, so a married couple who each hold business property can potentially shelter £2 million between them. But this depends on how the assets are structured and who owns what.
Impact on NI family businesses and farms
Northern Ireland will be disproportionately affected by these changes for several reasons.
Family business culture. NI has a higher proportion of family-owned businesses than most UK regions. Many of these businesses have been built over generations with the expectation that they’d pass to the next generation without a massive tax bill. That assumption is now broken for businesses valued above £1 million.
Agricultural holdings. NI has a substantial agricultural sector, and many farms are worth well above £1 million when you include land, buildings, and livestock. The new combined cap on BPR and APR means farming families face a significant potential IHT liability for the first time.
Cross-border estates. For NI families with assets in both Northern Ireland and the Republic of Ireland, estate planning becomes even more complex. The Republic has its own inheritance tax (Capital Acquisitions Tax, or CAT), which operates on completely different principles:
- CAT is charged on the recipient, not the estate
- The thresholds are much lower (€335,000 for child inheriting from parent, for 2025)
- The rate is 33%
- There is no equivalent of BPR in the same form (though there is a business relief and agricultural relief in Irish tax law)
A cross-border estate can potentially be subject to both UK IHT and Irish CAT, though double taxation relief is available under the UK-Ireland tax treaty. This area needs specialist advice.
Illiquid businesses. Many NI family businesses are asset-rich but cash-poor. A farm worth £3 million might generate modest annual profits. Finding £400,000 to pay an IHT bill could mean selling land, equipment, or the business itself. This is the scenario that most concerns NI business owners.
Planning strategies
The April 2026 changes mean that IHT planning is no longer optional for business owners with assets above £1 million. Here are the main strategies to consider.
Lifetime gifting
Gifts made during your lifetime fall out of your estate for IHT purposes after seven years (Potentially Exempt Transfers, or PETs). Gifting business assets or shares to the next generation during your lifetime is one of the most straightforward planning strategies.
However, there are complications:
- You need to genuinely give up control and benefit. A gift where you continue to benefit (a “gift with reservation”) is ineffective for IHT purposes.
- Capital gains tax (CGT) may apply on the gift, though holdover relief is usually available for business assets.
- If you die within seven years, the gift is brought back into your estate (with tapering relief after three years).
Trusts
Placing business assets into a trust can remove them from your estate. Trusts are particularly useful for succession planning because they allow you to retain some control over how and when the next generation receives the assets.
The main trust options for business property are:
- Discretionary trusts: Flexible, but subject to a 20% IHT charge on entry (above the nil rate band) and 10-yearly charges. BPR can eliminate the entry charge if the assets qualify.
- Interest in possession trusts: The beneficiary has an immediate right to the income. These can be effective for passing on business income while retaining the capital.
Trusts are complex and the tax rules have changed significantly in recent years. They need to be set up properly, with clear objectives and professional advice.
Life insurance
A life insurance policy written in trust can provide the cash to pay an IHT bill without forcing the sale of business assets. The policy proceeds go directly to the beneficiaries (via the trust) and don’t form part of the deceased’s estate.
For a business owner expecting an IHT liability of, say, £400,000, a whole-of-life policy for that amount, written into a discretionary trust, ensures the family business can pass intact to the next generation while the insurance covers the tax.
The cost of the premiums is a consideration, but for many business owners, it’s a pragmatic solution to the liquidity problem.
Shareholder agreements and cross-option agreements
If you co-own a business, a cross-option agreement ensures that on the death of one shareholder, the surviving shareholders can buy the deceased’s shares (funded by life insurance) rather than having the shares pass to the deceased’s family. This protects the business from unwanted shareholders and provides the family with cash instead of illiquid shares.
These agreements need to be carefully structured to work alongside BPR. The wrong type of agreement can jeopardise the BPR claim, so professional advice is essential.
Restructuring the business
If your company holds excepted assets or has drifted into investment activity, restructuring before April 2026 could preserve BPR qualification. Options include:
- Distributing excess cash as dividends (taxable, but potentially cheaper than the IHT consequence)
- Hiving off investment activities into a separate company
- Reinvesting surplus cash into the trading business
- Reviewing the company’s asset base to ensure everything is genuinely used for trading
The NI angle: what NI business owners should focus on
Review your business valuation. Do you know what your business is currently worth? Many NI business owners underestimate the value of their company, particularly goodwill and property. An up-to-date valuation is the starting point for any IHT planning.
Check your BPR qualification. Is your company “wholly or mainly” trading? Are there excepted assets that could reduce the BPR claim? Address these issues now, before April 2026.
Consider your cross-border position. If you have assets in the Republic of Ireland, or beneficiaries who are Irish-resident, you need advice that covers both jurisdictions. The interaction between UK IHT and Irish CAT is a specialist area.
Talk to your family. Succession planning isn’t just a tax exercise. It involves difficult conversations about who will run the business, how assets will be divided, and what the next generation actually wants. Starting these conversations early gives you more options.
Act before April 2026. Some planning strategies, particularly lifetime gifting and trust arrangements, are more effective if implemented before the new rules take effect. The seven-year clock for PETs means that the earlier you start, the better.
Start planning now
IHT planning is not something you do once and forget about. Your business changes, the tax rules change, and your personal circumstances change. The 2025 Budget has made this more urgent than ever for NI business owners.
At a minimum, you should be reviewing:
- Your current will and whether it’s still fit for purpose
- The ownership structure of your business assets
- Whether your business qualifies for BPR under the current (and future) rules
- Your life insurance provision
- Your cross-border position (if applicable)
- Whether trusts or lifetime gifting should form part of your strategy
How Arro can help
IHT planning for business owners is one of the most complex areas of personal tax, and the 2025 Budget changes have raised the stakes. We work with NI business owners and farming families to review their exposure, ensure BPR qualification, and put practical plans in place. If you haven’t reviewed your position recently, now is the time to book a conversation with our team.