Reforming tax, rethinking succession

While recent fiscal announcements have been relatively quiet, reforms already scheduled from April 2026 and April 2027, will reshape how owner-managed businesses approach succession planning.  

For accountants and advisers working with SMEs, the implications are substantial. Business Property Relief (BPR) and Agricultural Property Relief (APR) have long allowed trading businesses and farms to pass between generations without triggering large inheritance tax liabilities. That framework is now changing.  

From April 2026, unlimited inheritance tax relief for qualifying business and agricultural assets will end. Instead, relief will be capped, with the first £2.5 million of qualifying assets per taxpayer eligible for relief. Qualifying assets within the estate on death, which exceed this figure, will benefit from 50% relief (an effective tax cost of 20%). 

Although the cap is now higher than the £1 million cap originally announced, it still represents a significant policy shift. Many owner-managed businesses, particularly those with valuable assets tied up in property, land or equipment, will need to reassess their succession plans. 

The reason these reliefs existed in the first place was straightforward. Without them, heirs might have to sell part, or all, of a business simply to pay an inheritance tax bill. For many SMEs, where asset values are high, but profits and liquidity are more modest, that risk becomes very real. 

The reforms do not remove BPR and APR entirely, but they introduce limits that many business owners have never previously needed to think about. As a result, succession planning is moving much higher up the advisory agenda. 

For many SMEs, the most important consequence of the reforms is timing. In the past, succession planning often happened gradually. Ownership might pass through an estate when a founder died, with reliefs ensuring the business itself was not heavily taxed.  

With relief now capped, that approach may no longer be the most efficient. Some business owners may need to consider transferring ownership earlier than originally planned. In certain cases, gifting shares during their lifetime, either directly or through trusts, could significantly reduce inheritance tax exposure.  

If structured correctly, such gifts can fall outside the estate after seven years. But these decisions require careful planning. Capital gains tax, governance issues, and the readiness of the next generation to run the business all need to be considered.  

For advisers, this highlights that succession planning is not just about tax. Preparing the next generation to take on leadership roles can be just as important as the tax planning itself.  

A second major change arrives in April 2027, when unused pension funds will be brought within the scope of inheritance tax. Pensions have traditionally been one of the most tax-efficient ways to pass wealth between generations. Beneficiaries typically paid income tax when withdrawing funds, but the pension itself usually fell outside the estate.  

Once pensions are included in estates, families could face a form of double taxation, inheritance tax on the pension value, followed by income tax when beneficiaries access the remaining funds.  

For many individuals and their advisers, this may prompt a rethink of established planning strategies. In many cases, drawing down pension assets during a person’s lifetime will be far more attractive than leaving them untouched.  

As with most areas of tax planning, there is no single solution. The right strategy will depend on the size of the estate and/or business, ownership structure, family circumstances, and long-term plans for the company. Some business owners may benefit from lifetime transfers, while others may focus on restructuring ownership or using existing gifting allowances.  

Even where inheritance tax cannot be avoided entirely, planning ahead can significantly reduce the risk that an SME must be sold or broken up to meet a tax bill.  

For advisers and accountants working with SMEs, the reforms scheduled for 2026 and 2027 are an important turning point.  

Inheritance tax has always been one component of succession planning but going forward, it will be a far more prominent one.  

For SMEs, the key step now is simply starting the conversation. The earlier business owners engage with their advisers, the greater the opportunity to develop a succession strategy that protects both the business and the family behind it.