Inheritance Tax on limited company shares

If you’re a business owner with shares in a limited company, Inheritance Tax (IHT) could significantly impact what your heirs inherit. Without careful planning, your family may face a 40% tax bill on privately held shares, which may be illiquid and difficult to convert into cash.

Fortunately, a private limited company offers flexible, tax-efficient options for passing ownership to future generations. Current tax reliefs such as Business Property Relief (BPR), nil rate bands, and trust-based structures help minimise or eliminate IHT on company shares. However, new rules from April 2026 will significantly reduce BPR reliefs on estates over £1 million, so early action is critical.

This article shows how you can use thresholds, reliefs, and other strategies to reduce your IHT bill and keep your company intact for future generations.

What is Inheritance Tax (IHT), and does it include shares?

When you pass away, IHT of 40% must be paid on your property, money, and possessions, including any limited company shares you own. This means passing company shares to your family members could trigger significant liabilities.

• A guide to limited company shares
• Share transfers from one person to another
• What is a family investment company?

Private company shares are usually illiquid, making it difficult to pay the IHT without selling part or all of the business.

Who pays IHT on company shares, and how?

You can transfer shares to your heirs as a gift while you’re still alive, or as part of your will.

When you die, your personal representative (your will executor or estate administrator) will pay any IHT that’s due before giving the inheritance to your heirs. When assessing the worth of shares in your estate, they must use the open market value, not the nominal value.

Your heirs may have to pay the tax, rather than your representative, if:

• You’ve gifted the shares in the seven years before you die.
• Your inheritance is in a trust (see below), and the trust does not or cannot pay.
• The personal representative did not pay before transferring the inheritance.

IHT relief options for business owners

Worried about how much IHT your shares might attract? There are many ways to avoid or minimise the tax.

Using Inheritance Tax thresholds

Typically, IHT is not payable if:

• The value of your estate, including shares, is below the £325,000 IHT threshold (the nil rate band – NRB).
• You leave all other assets above that level to your spouse or civil partner, a charity, or a community amateur sports club.
• The residence nil rate band (RNRB) is an additional relief of £175,000 that reduces IHT on a family home.

As these exemptions are transferable to spouses and partners, widows and widowers can receive reliefs worth £650,000 on assets like shares and possessions. If their estate includes the family home, this increases to £1 million. You will be charged 40% IHT on the portion of your estate that exceeds these thresholds.

The 2025 Budget extended these nil rate bands to at least April 2031.

Taper relief on gifts

If you gift assets such as unlisted shares, you receive taper relief that increases gradually from the third to the seventh year after the gift. If you die seven years or more after the gift, it becomes completely free of IHT. However, ensure that handing over shares doesn’t compromise your business’s control, governance, or long-term goals.

Using BPR

Business Property Relief (BPR), also known as Business Relief, lets families pass their businesses through the generations by exempting gifted or inherited shares from IHT.

You can claim the relief provided it’s a private business, not listed on a stock exchange as a public company. You must have owned the shares for at least two years before you die. Shares in Alternative Investment Market (AIM) listed companies also qualify.

Your personal representative will claim BPR by completing Form IHT400 and schedule IHT413.

What doesn’t qualify?

You cannot claim BPR if your company:

• Mainly deals with stocks or shares, land or buildings, or in making or holding investments. For example, shares in a company owning buy-to-let properties are excluded. This is because they’re regarded as a type of investment company.
• Is a not-for-profit organisation.
• Is being sold, unless the sale is to a company that will carry on the business.
• Is being wound up, unless this is to allow its business to carry on.
• Also qualifies for Agricultural Relief
• Was not used mainly for business in the two years before it was transferred as a gift or in your will.
• Is not needed for future use in the business.

If part of a non-qualifying asset is used in the business, that part might qualify for BPR. For example, if you use one room in a building as a shop and the other rooms as your home, the shop will qualify.

Planning for BPR changes in April 2026

This valuable tax break currently applies to 100% of shares. However, from April 2026 (at least until April 2031), only the first £1 million of assets will qualify for 100% BPR. Any excess will receive only 50% BPR. This change could expose shares in many businesses to a substantial IHT liability.

Ryan Bevan, Head of IHT and Trusts at accountants BKL, says some of his clients are gifting shares now in advance of the changes. “If they die before seven years have elapsed from the gift, the BPR is revisited and allowed, provided the recipients have kept the shares,” he says. “If the death is after 5 April 2026 and within seven years, the new limits will apply.

You also need to consider the Capital Gains Tax (CGT) implications of gifts, as they are treated as disposals. Younger shareholders with holdings worth more than £1 million may consider staggered gifting over several years.

Ryan highlights that if you gift shares to a partner and they keep the shares, BPR may apply to them when they pass away. If they sell them, this relief will be lost. Sale proceeds in their estate will be liable to IHT. Generally, any shares left to charities will also be exempt.

Because the incoming £1 million limit on 100% BPR is not transferable between spouses on death, some clients are also now dividing ownership of their shares, he adds. This way, you can ensure that both civil partners or a married couple receive the £1 million relief, protecting a total of £2 million.

Examples of how to use IHT thresholds and BPR

BPR is applied to qualifying assets in addition to the NRB and the RNRB exemptions. BPR reduces the value of the asset. NRB and RNRB then apply to the remaining estate.

Below are three examples illustrating how IHT applies based on estate value, share ownership, and changes to BPR rules in the 2025/26 tax year.

Example 1

The estate, which includes company shares, is worth £200,000. This is below the NRB tax-free threshold of £325,000, and there’s no IHT to pay.

Example 2

The estate, which includes shares but no property, is valued at £500,000. The tax-free threshold is £325,000, so the IHT will be 40% of £175,000 (£500,000 minus £325,000), equalling £70,000.

Example 3

The estate consists entirely of unlisted shares, valued at £2 million. In 2025/26, this will receive 100% BPR with no IHT to pay. But from April 2026, £1 million of it will only receive 50% relief. That leaves £500,000 liable to IHT, and a bill of £70,000 after applying the NRB, with no IHT to pay. But from April 2026, £1 million of it will only receive 50% relief. That leaves £500,000 liable to IHT, and a bill of £70,000 after applying the NRB.

Using other structures to protect your shares

With upcoming BPR changes, many company owners are exploring complex structures – like trusts and Family Investment Companies (FICs) – to reduce their IHT on shares.

Trusts

Transferring shares into a trust during your lifetime removes them from your estate, making them IHT exempt, while allowing you to retain some control over the assets. You’d need a lawyer to advise on what is appropriate for your situation and set up the trust.

Family Investment Companies

FICs enable family members to hold shares in an entity, thereby reducing their direct ownership of assets. These structures allow gradual wealth transfer, potentially reducing the value of your estate for IHT while protecting family assets.

These planning vehicles are especially useful if your business is growing rapidly and you want to secure long-term succession while reducing your estate for tax purposes.

Minimising your IHT on shares: A planning checklist

• Consult experts: Engage an estate planning lawyer and/or a tax adviser due to the complexity of IHT, BPR, and other associated rules.
• Check your BPR qualification: Ensure you’ve owned your shares for at least two years and that the business is a private limited company that meets all the qualifying criteria.
• Maximise tax-free allowances: Once you’ve reduced your estate using BPR, fully use your nil rate band (£325,000) plus any unused allowance transferred from a spouse.
• Plan for the Business Relief changes: After April 2026, only the first £1 million will receive 100% relief; the excess receives only 50%. If your holdings exceed £1 million, take action to mitigate this impact.
• Consider:
• • Dividing share ownership with a spouse to secure £2 million in 100% relief combined.
  • Gifting shares to heirs during your lifetime to start the seven-year clock for IHT exemption (Taper Relief applies from year three).
  • Using advanced structures such as a trust or a Family Investment Company to reduce your estate while maintaining control.
• Document everything: Ensure your will clearly specifies the beneficiaries, and keep records of share ownership for your personal representative.

Secure your legacy with the right foundations

When it comes to succession or estate planning, getting started on the right legal terms is essential. The structure and status of your business today can significantly impact how smoothly it can be passed on.

By selecting the right legal structure from the beginning, you protect your assets and guarantee a smooth transition for future generations. Our company formation packages are designed to ensure compliance and provide peace of mind, supporting your long-term goals.

Don’t leave your legacy to chance. Start strong with the right structure and compliance support from Rapid Formations.