Rachel Reeves gave elderly small business owners an early Christmas present on December 23, when the Treasury conceded it should allow those with business assets worth up to £2.5 million to pass them on to their children free from inheritance tax.
She had threatened to tax all business assets above £1 million at 20 per cent on the death of the owner from this April, so the last-minute partial reprieve was welcomed by many, even if it was lost amid the coverage of a similar concession to the owners of farms.
However, for larger family businesses, the concession on business property relief (BPR) was about as useful as a lump of coal.
Mike Brundle, 52, is the fifth generation to head up his family business, a steel and metal products retailer, based in Rainham, Essex. He is now just hoping he can “outlive” the current government and that the next one restores the full IHT relief so he can afford to pass it onto the next generation.
F H Brundle was founded in 1889 and now employs over 300 people with a revenue of almost £100 million. “We’ve been through two world wars, two pandemics, countless recessions, but we can’t cope with the removal of business property relief. This is the end of an era for us, really, which is very sad.”
Company owners who had already taken or started to take steps to protect their businesses are also frustrated, accountants said, as some measures such as share transfers and the placing of assets in trusts cannot be undone.
Mike Brundle is the fifth generation to lead his family business
F H BRUNDLE
Joe Spencer, a partner at MHA, an accountancy firm, said the last-minute nature of the change in December was “disappointing” and questioned why the higher cap was not set out at the start.
“A lot of businesses would have incurred a lot of fees, a lot of time and a lot of stress dealing with it and trying to mitigate it based on what was previously proposed,” Spencer said.
The change of heart came after nearly a year of campaigning and protest, most notably by farmers. They faced losing the protection from inheritance tax of BPR as well as agricultural property relief (APR), applied to farm estates.
It still means that from April 6, the estates of deceased owners of businesses and family farms that pass on to the next generation will be required to pay a 20 per cent tax on the value of the inherited assets over £2.5 million, or £5 million if they have previously transferred from a spouse or civil partner.
Paul Townson, a tax partner at BDO, the professional services firm, said the increase in the allowance to £2.5/£5 million has made the new tax look “more manageable” for some, even if the value of their business is over the threshold and any amount over the allowance is then taxed at 20 per cent.
• I’m an inheritance tax expert, here are my five top tips for families
BPR had previously allowed business owners to pass on their company with no inheritance tax liability. This changed in the autumn 2024 budget, when Reeves said the relief would only apply to estates worth up to £1 million, with those above that taxed at an effective rate of 20 per cent — half the usual rate of inheritance tax.
Business owners fought back highlighting that few would have the sort of cash piles required to pay such large IHT bills, forcing them to sell off parts of their businesses before their death or, in some cases, close down entirely.
Farmers, with large estates but low profit margins, were particularly vocal, noisily driving combine harvesters through London and blocking parts of Whitehall.
In the 2025 autumn budget, the government accepted it would only be fair for the £1 million tax-free amount to be transferable between spouses. This means that if one partner dies, their £1 million can be transferred to the other partner, creating an effective allowance of £2 million.
Farmers protesting in November 2024 over the changes to inheritance tax rules
TOLGA AKMEN/EPA
This only applies to couples that are legally married or are in civil partnerships. Sonal Shah, a partner at the law firm Farrer & Co, said: “The inheritance tax advantages of being married are huge and deathbed marriages take place. It happens.”
Some owners might be considering formalising their relationships to qualify. Following further pressure, the government increased the individual allowance to £2.5 million, with couples able to access £5 million in relief. It said it had “listened to concerns of the farming community and businesses about the reforms” in making this concession and had acted to “protect more farms and businesses, while maintaining the core principle that the most valuable agricultural and business assets should not receive unlimited relief”.
Following the announcement, Dan Tomlinson, the exchequer secretary, said the government expected the policy to raise £300 million. The government estimates that the latest change will reduce the number of companies paying IHT to 220 annually, down from the previous estimate of 325. Some accountants believe this number is too low.
Tina McKenzie, policy chair of the Federation of Small Businesses, said the government should go further. “Ideally, we would have liked to see a tax-free allowance of £5 million regardless of whether you are passing on your business to a spouse or not.
“The Treasury should now use the time before the spring forecast to take a similar look at other rising cost decisions due to come in force in April, before they lock in further pressure on small firms.”
Townson points out that families that incur the new inheritance tax bill will have ten years to pay it, easing some of the burden. Yet, in order to pay that tax bill, families may have to draw money out of the business and face a double charge of income tax on the dividend before they then pay the inheritance tax.
Others are still campaigning for a full U-turn on the policy, restoring the old relief for all estates. Neil Davy, chief executive of Family Business UK, said that the change in December was welcome and many smaller family companies could now refocus on building their businesses. But, he added that the “majority of mid to large family firms” will remain affected.
“For these British family firms, businesses with revenues in the tens and hundreds of millions, and even billions, this policy still presents a material challenge that deliberately disadvantages them against their non-family-owned and international competitors,” he said.
How a thriving firm can lose its inheritance tax shield
The way that business owners interact with inheritance tax can become complicated as the nature of their businesses change over time.
For instance, Philip Myatt, 65, founded PJA Developments, a property development business in Stoke-on-Trent, with his wife in the mid-1990s. They started renting out properties to create more income. At a certain point, the income from rentals produced more income than the property development meaning the company became classified as an investment business under HM Revenue and Customs rules.
Investment businesses are not entitled to any kind of inheritance tax relief, meaning that upon their death their daughter will be forced to pay the full 40 per cent IHT on the value of the business estate.
Myatt said: “The thought was that it would be nice for her to inherit what we have created over these many years.” Wyatt said his daughter would need to sell 50 per cent of the properties to cover the bill, which would be difficult to do in the six months she would have to pay the inheritance tax.
“It doesn’t seem as though [the government] wants to try and encourage people to be entrepreneurs at all … to develop and make something, and do well for themselves,” he said.