Estate Planning for Entrepreneurs: Protecting Your Business Legacy

The entrepreneur's estate planning challenge

The conventional estate planning toolkit is designed for people with diversified portfolios of liquid assets: ISAs, pensions, investment accounts, property. The entrepreneur's situation is fundamentally different. A business owner who has built a successful company may have 80 per cent or more of their net worth in a single illiquid asset — the business itself. That business cannot easily be sold in pieces to meet a tax bill, and its value depends on the founder's continued involvement.

When that business owner dies, the estate faces an inheritance tax assessment. If the business does not qualify for reliefs, or qualifies only partially, the estate may face a bill that can only be settled by selling the business — often on a distressed timeline and at a below-market price. This is not a hypothetical risk: HMRC does not extend its payment terms out of sentiment.

This guide sets out the tools available to entrepreneurs for managing this risk: Business Property Relief, Business Asset Disposal Relief, the Family Investment Company, and the Employee Ownership Trust.

Business Property Relief: the entrepreneur's IHT shield

Business Property Relief (BPR) is one of the most powerful tax reliefs available in the UK tax system. For qualifying businesses, it provides 100 per cent relief from inheritance tax on the business interest. From 6 April 2026, however, 100 per cent relief is capped at a combined £2.5 million allowance per estate, with relief on qualifying business and agricultural property above that allowance reduced to 50 per cent — so for larger business estates BPR no longer means zero IHT on the whole of what may be the largest single asset in the estate. (The cap was originally announced as £1 million in the October 2024 Budget and raised to £2.5 million in December 2025; the allowance is transferable between spouses and civil partners.)

The conditions for BPR are:

The business must be a trading business. Businesses that consist wholly or mainly of holding or making investments — property investment companies, for example — do not qualify. This is the most frequently litigated aspect of BPR.

The business interest must have been held for at least two years immediately before the transfer (whether on death or as a lifetime gift).

The business must be a "relevant business property" — which includes sole trader businesses, shares in unquoted companies (including AIM-listed shares), and an interest in a trading partnership.

The 100 per cent BPR rate applies to unquoted shares and sole trader or partnership interests. Quoted shares (other than AIM) do not qualify for BPR. Commercial property used by the business qualifies for 50 per cent BPR, not 100 per cent.

The "wholly or mainly" test and mixed businesses

HMRC scrutinises businesses that combine trading and investment activities. A business that earns rental income alongside its trading income — a manufacturer that owns and rents surplus buildings, for example — may fail the "wholly or mainly trading" test if the investment element is too large. HMRC typically applies a balance sheet test (are more than 50 per cent of assets employed in trading?) and an income test (does more than 50 per cent of income arise from trading?).

For businesses at risk of failing this test, restructuring may be available: separating the investment assets into a different entity, or reviewing how assets are classified on the balance sheet. This kind of pre-death restructuring needs to be done well in advance of any expected death — the BPR two-year holding period resets on restructuring.

The business must pass the BPR test at the date of death, not merely at the time the planning was done. A business that trades profitably for decades but has pivoted to a primarily investment model in the years before death may fail the test at the critical moment.

BADR and BPR: the lifetime versus death planning interaction

Business Asset Disposal Relief (BADR — formerly Entrepreneurs' Relief) reduces the CGT rate on the first £1 million of qualifying gains on a sale of a qualifying business or business shares, subject to various conditions including a 5 per cent shareholding and two-year holding period. The BADR rate has risen from 10 per cent (to April 2025) to 14 per cent in 2025/26 and to 18 per cent for 2026/27.

BADR is a lifetime relief. If you sell your business during your lifetime, BADR applies. If you hold the business until death, BPR applies. The CGT-free base-cost uplift on death remains in place, so assets passing on death are revalued to their market value at the date of death (the inheriting beneficiaries do not inherit at the deceased's original cost).

The significant change from 6 April 2026 is on the IHT side: 100% BPR is capped at a combined £2.5 million allowance per estate, with relief above that allowance reduced to 50% (and AIM/unlisted shares attracting 50% relief only). Previously, a business owner who held qualifying shares until death typically paid neither CGT (due to the uplift) nor IHT (due to unlimited 100% BPR). From April 2026, a larger business estate can face an effective IHT charge on the value above the £2.5 million allowance — making the interaction of lifetime and death planning more important than ever.

The interaction of these reliefs is complex. The £2.5 million BPR cap is legislated and takes effect from 6 April 2026. Take current specialist advice on the timing of any business exit.

Planning for illiquidity: life insurance

Even where BPR applies and the business interest itself is IHT-free, the estate may have other taxable assets — property, investments, accumulated cash — that generate an IHT liability. Life insurance written in trust is one of the most reliable ways to ensure the estate has liquidity to meet an IHT bill without selling assets under pressure.

A whole-of-life policy written in trust pays out on death and is not itself part of the estate (because it is in trust). The proceeds can be used by the trustees to purchase assets from the estate, providing the estate with cash to pay HMRC. The cost of this solution is the ongoing premium, which must be weighed against the expected IHT liability and the time horizon.

The Family Investment Company

The Family Investment Company (FIC) is a private limited company used as a vehicle to hold investments rather than to trade. It allows a family to accumulate investment returns at corporation tax rates (currently 25 per cent, or 19 per cent for smaller profits) rather than at income tax rates of up to 45 per cent. Dividends can be retained in the company and invested, compounding at lower rates of tax over time.

More importantly from an estate planning perspective, the FIC structure allows the founders (typically parents) to retain control via a separate class of voting shares, while issuing non-voting growth shares (with economic rights but no control rights) to children or grandchildren at negligible value. Over time, the growth in the company's value accretes to the children's shares, passing wealth down the generations without gifts being made.

A FIC is not a trading business and does not qualify for BPR. It also does not give the founders a free exit: their shares in the FIC are themselves in their estate. The FIC is a tool for managing the tax on future investment returns and for transferring future growth — it is not a substitute for BPR planning on the trading business.

Employee Ownership Trusts

The Employee Ownership Trust (EOT) is a mechanism under which a business owner sells their company to a trust held for the benefit of the employees. The seller pays zero CGT on the sale — a complete exemption from capital gains tax, regardless of the size of the gain. The business becomes employee-owned, and profits distributed to employees can be paid tax-free up to £3,600 per person per year.

The EOT model is best suited to owners who: want to exit the business but wish it to continue as a going concern rather than be sold to a competitor or private equity; are committed to the welfare of their employees as a genuine priority; and do not require the maximum sale price immediately (the trust typically pays the owner over time from the business's future profits).

The EOT is not an IHT planning tool in the conventional sense — the sale extinguishes the business interest, which might have qualified for BPR on death. But it is a powerful alternative to a conventional trade sale, and for the right owner with the right business, the combination of CGT exemption and employee welfare outcomes can be compelling.

Risks include: the ongoing business performance must fund the deferred consideration payments; the trust governance must be robust; and HMRC scrutinises EOT transactions to ensure they are genuine employee ownership arrangements and not disguised asset extraction.

All estate planning for business owners should be undertaken with specialist legal and tax advice. Business structures are complex, circumstances vary considerably, and tax rules change. This guide is for information only.

How Global Investments can help

Global Investments advises entrepreneurs and business owners on the integration of business exit planning with estate planning, IHT strategy, and personal wealth management. We can model the relative merits of lifetime sale versus hold-to-death strategies, review BPR qualification and identify risks, and coordinate the estate plan with life insurance, trust structures, and family governance. Contact our private client team to arrange a comprehensive business owner review.