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Why Inheritance Tax Planning has become a priority for Business Owners and how to plan for the future.

Posted: in SME Business Owners

As a business owner, you’ve invested significant time and effort (and likely blood, sweat and tears!) into building a successful enterprise. However, without proper estate planning, your business could face serious challenges if you pass away or lose mental capacity. Having a well-structured Will and Lasting Power of Attorney (LPA) is essential to ensure business continuity, protect your employees and family, and manage potential Inheritance Tax (IHT) liabilities effectively.

There are IHT changes due to come into force in April 2026 which limit IHT relief on business assets (Business Property Relief (BPR)) and agricultural assets (Agricultural Property Relief (APR)). The farming community and press have been vocal about the IHT changes coming into force, but I’ve not seen the same degree of concern raised by business owners. I’m concerned that the changes haven’t been as well publicised or understood and that the business community is not prepared. If you’re a business owner - please read on.

The Importance of a Will for Business Owners

A Will is vital for business owners because it determines how your business interests will be handled after your death. Without one, the rules of intestacy apply, which can lead to uncertainty, delay, financial strain, and even business failure.

  1. Business Continuity and Succession Planning

If you die without a Will, your business interests may be frozen while a grant of letters of administration (the term for a grant of probate where there is no Will) is obtained from the court. This can cause severe operational disruptions. A well-drafted Will allows for a smooth transition and ensures that the right person or people take control.

  1. Appointing the Right Successors

A Will enables you to decide who will inherit your business—whether a family member, co-owner, or key employee. Without this clarity, your business could end up in the hands of someone who lacks the expertise or desire to manage it.

  1. Inheritance Tax (IHT) and Business Property Relief (BPR)

One of the biggest concerns for business owners is the potential IHT liability on their estate. Business assets currently qualify for unlimited BPR which can reduce IHT by up to 100%, but from April 2026, this relief is capped at £1 million per individual.

Key Considerations for the £1 Million BPR Cap:

  • The £1 million limit applies per individual and is not transferable between spouses.
  • If a business owner passes their business to their spouse, BPR is not used, and the gift is exempt for IHT under the spouse exemption. Any potential IHT liability is therefore deferred.
  • However, if the business is later passed to children or other beneficiaries, they may face a significant IHT liability, especially if the business value exceeds the £1 million cap.
  • Business owners may need to plan for BPR usage on the first death, rather than passing the business entirely to their spouse / civil partner, to avoid missing out on tax relief. Similarly, for unmarried couples, it may be wise to pass a proportion of the business to another person / trust to make better use of both parties allowances. Carefully structured wills to achieve this have become crucial.
  1. How Will Your Beneficiaries Pay IHT?

If your business is to continue after your death, careful planning is needed to ensure there are sufficient funds to cover any IHT liabilities. Unlike liquid assets, business interests are often tied up in operations, making it difficult for heirs to raise funds. Options to address this include:

  • Life Insurance Policies – Placing a policy in trust can provide a tax-free lump sum to cover IHT liabilities
  • Retaining Cash Reserves – Keeping part of business profits in liquid assets can help cover tax obligations.
  • Trusts and Estate Planning – Placing business assets in a trust may help mitigate tax liabilities while maintaining business control.
  • Option Agreements – These allow co-owners to buy out your share, ensuring the business remains operational while providing liquidity for your heirs.
  1. Preventing Family Disputes

Without a Will, disputes can arise over who should inherit the business. It is important to note that for unmarried couples the rules that apply without a Will (the Intestacy Rules) make no provision for your partner.  For married couples with children, depending on the value of the estate your spouse may not receive everything and may need to share it with children. This could potentially leave your spouse without access to needed funds and create an IHT liability.

Disputes can lead to legal battles, financial instability, and reputational damage. A well-structured Will clearly outlines your wishes and reduces the risk of conflict.

Why Business Owners Need a Lasting Power of Attorney (LPA)

While a Will protects your business after death, an LPA ensures that it can continue running if you lose mental capacity due to illness or accident or are temporarily unable to manage your business.

There are two types of Lasting Powers of Attorney:

  1. Property and Financial Affairs LPA – enables an appointed attorney to manage business finances and make key decisions.
  2. Health and Welfare LPA – covers personal medical and care decisions.

For business owners, the Property and Financial Affairs LPA is particularly important.

  1. Avoiding Business Disruption

If you lose capacity without an LPA, no one has automatic authority to manage your business. Banks may freeze accounts, suppliers may refuse to deal with the business, and employees may be left in uncertainty. A Business LPA allows a trusted person to step in immediately.

  1. Choosing the Right Attorney

Managing a business requires specialist knowledge. With a Business LPA, you may wish to appoint a business partner, accountant, or trusted advisor rather than a family member who may lack expertise.

  1. Avoiding Court of Protection Delays

Without an LPA, your family or business partners may need to apply to the Court of Protection for a deputyship order—an expensive, time-consuming, and uncertain process. An LPA avoids this by ensuring someone is pre-authorised to act.

  1. Protecting Banking and Contractual Agreements

Many businesses rely on contracts, financing arrangements, and supplier relationships. If the sole director or key decision-maker loses capacity, the inability to sign documents or access funds can cause major issues. An LPA ensures continued access to business finances and decision-making authority.

Key Considerations for Business Owners

  • Company Structure Matters: If your business is a partnership or limited company, review the partnership agreement or articles of association. Some agreements include provisions for incapacity or death.
  • Option Agreements: These agreements allow business partners to buy out a deceased owner’s shares, ensuring the business remains operational while providing liquidity to the deceased’s family.
  • Regularly Review Your Estate Plan: Business and tax laws change, so it’s essential to keep your Will and LPA up to date with your current business structure and IHT planning needs.

Final Thoughts

Failing to plan for incapacity or death can place your business, employees, and loved ones at significant risk. A Will ensures that your business interests are distributed according to your wishes, while an LPA safeguards its operation if you lose mental capacity.

With the new £1 million cap on Business Property Relief, IHT planning has become even more critical. Since the allowance is not transferable between spouses, business owners must carefully consider how to use the allowance on the first death to prevent a future IHT burden. This may mean structuring ownership so that the business passes directly to the next generation or exploring other tax-efficient strategies.

If you haven’t already put these protections in place, now is the time to act. Seeking legal advice from a STEP-qualified solicitor ensures that your business succession plan is robust, tax-efficient, and tailored to your needs.

For more information or if you'd like to discuss further please give us a call on 01244 356789 or email info@cullimoredutton.co.uk and a member of our team will get in touch.