Protect your business from inheritance tax

For any business owner safeguarding the future of your company is a primary goal. A significant inheritance tax (IHT) bill can create a major financial burden for your beneficiaries, and this risk is set to increase. With changes to Business Relief (BR) due in April 2026, a standard life insurance policy, when set up correctly, offers a straightforward way to protect your legacy.

The IHT challenge for shareholders

Currently, shares in many private trading companies qualify for 100% BR, meaning they can be passed on free of IHT. From April 2026, this 100% relief will be capped at the first £1 million of your business’s value. The value above this will only receive 50% relief, exposing the remainder to IHT at a rate of 40%.

Consider a shareholder with a business valued at £3 million. Before April 2026, the entire £3 million could be exempt from IHT. After April 2026, the first £1 million is exempt. The remaining £2 million gets 50% relief, leaving £2 million chargeable to IHT at 50% of the standard rate of 40%. This creates a potential tax bill of £400,000.

This change means beneficiaries might be forced to sell company shares to settle the tax bill, potentially disrupting or even losing control of the business.

The solution

A life insurance policy can provide a simple and effective solution. You or your company can take out a personal policy on your own life for an amount calculated to cover the expected IHT liability.

However, there is one step that is absolutely critical - the policy must be written into a trust. By placing the policy in trust, the insurance payout is made directly to your nominated beneficiaries (via the trustees). It doesn’t become part of your estate. This has two huge benefits:

1. The payout itself is not subject to IHT
2. It avoids inflating the value of your estate, which would increase the IHT bill further

If the policy isn’t placed in trust, the payout simply adds to your estate.

How it works in practice

1. You calculate the potential IHT bill your shares would create (eg £400,000)
2. You take out a personal life insurance policy for that amount and place it into a trust
3. You pay the premiums from your personal, post-tax income
4. Upon your death, the insurer pays the lump sum to the trust, making the cash available for your beneficiaries to settle the IHT bill

This ensures the full value of the shares can be passed on.

Plan for a secure future

The upcoming changes to BR make estate planning more important than ever. A personal life insurance policy, when correctly structured within a trust, is a tool for providing liquidity and protecting your business for the next generation.

Risk considerations

• Cover is only maintained while premiums continue to be paid
• The benefits are selected at the outset when the plan is written. Over time, changes in client circumstances or inflation may mean the original cover is insufficient for the client’s needs.
• The plan has no cash value at any time
• There’s normally no continuation option at the end of the policy term. So, once the term is reached, cover will cease.
• If any relevant information provided during the application process is not disclosed accurately and honestly, any cover offered may be rendered invalid, potentially resulting in claims not being paid.

This article was written for Mills & Reeve by Jon Fisher, head of wealth management at Sedulo Wealth.