Inheritance tax business relief – where are we now?

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The inheritance tax (IHT) agricultural relief U-turns have been well publicised, but the changes apply equally to business relief.​

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Currently, qualifying business property included in a deceased’s estate qualifies for 100% relief regardless of the value of the business property. The relief means that an unincorporated business or a shareholding in an unlisted company can be left to the next generation without any IHT implications.

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There are various conditions for business relief to be available, but the most important point is that the property must have been owned for two years.​​​​​​​​​​

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Timeline of changes

October 2024 Budget: The initial proposals would have restricted 100% business relief to a maximum of £1 million from 6 April 2026. For qualifying business property in excess of £1 million, relief would have been at the rate of 50%. Therefore, on a business valued at £5 million, IHT would have increased from zero to £800,000, assuming nil rate bands are used against other assets.

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November 2025 Budget: The £1 million allowance was initially not going to be transferable between spouses or civil partners. The first U-turn saw the allowance made transferable to a surviving spouse or civil partner (even if first death occurred before 6 April 2026). Therefore, the amount of IHT on a business valued at £5 million could potentially be cut from the original £800,000 to £600,000.

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December 2025 U-turn: In an announcement made just before Christmas, the government said that the 100% allowance will now be capped at £2.5 million (and will stay at this level until at least 5 April 2031). This means the £5 million business property will again be fully exempt if a surviving spouse or civil partner’s allowance is available.

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​​Cohabiting partners

Unlike married couples and civil partners, the £2.5 million 100% allowance is not transferable to a surviving partner where the couple are unmarried or not in a civil partnership. The potential IHT cost is £500,000. Nil rate bands of up to £500,000 are also not transferable, which is another potential IHT loss of £200,000.

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Although a long-term unmarried couple may be content as they are, the IHT implications of remaining unmarried could merit a rethink.

Some examples of how the £2.5 million 100% allowance will work can be found here (note that the examples are based on agricultural property, but the principle is the same).

 

 

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Tax charges to rise on loans to directors

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The tax charge when a director, who is also a participator, has an outstanding loan with a close company is going up by two percentage points to 35.75% from 6 April 2026.​

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Very broadly, a participator is a shareholder in the company, and a close company is one controlled by five or fewer participators.

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Overdrawn loan account

Loans between a director and their company are fairly common, and there are various reasons why a director’s loan account can end up overdrawn. An overdrawn director’s loan account will normally be cleared by voting the director a dividend or bonus, but there are situations where this is not done This could be because the tax implications are prohibitive for a particular tax year, or because the company does not have sufficient profits available to pay a dividend.​

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When the tax charge applies

The tax charge is payable when an outstanding loan is not repaid within nine months and a day of the end of the company’s accounting period.

For example, on 15 April 2026, a director withdraws £150,000 from their personal company to help fund a private property purchase. The company has an accounting date of 31 March:  

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• The loan falls in the company’s year ending 31 March 2027, so there will be no tax charge if it is repaid by 1 January 2028. By careful timing, the director can make use of company funds for over 20 months, with the only tax being what is charged on the director for having a beneficial loan.

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• If not repaid by 1 January 2028, the company will have to pay a tax charge of £53,625 (£150,000 at 35.75%) along with its corporation tax liability.

 

The tax charge will be refunded by HMRC if – after 1 January 2028 – the loan is repaid or written off.

HMRC’s basic guidance on loans to director can be found here.

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Property income tax rates going up

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Landlords have had one piece of bad news after another of late. With the Renters' Rights Act 2025 recently added to the statute books, landlords are now facing an across-the-board two percentage point increase for property income tax rates from 6 April 2027.​

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The rate increase will be achieved by the creation of a separate set of income tax rates for property income. The property basic rate will be 22%, the property higher rate will be 42% and the property additional rate will be 47%.

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The new property income tax rates will only apply for English, Welsh and Northern Irish landlords. However, the devolved Scottish government will be given the power to also increase rates.​​​​​​​​​

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Uneven impact

Relief for residential finance costs is going to increase in line with the new property basic rate, which means it will be set at 22% from 6 April 2027.

Therefore, highly geared landlords will be less impacted from the changes than landlords who have no, or very little, borrowing:

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• For example, a higher rate taxpayer with property income of £20,000 and no finance costs, will be looking at an annual tax increase of £400.

• However, if finance costs are £15,000, the tax increase will only be £100.

 

The changes are more serious for those with a larger portfolio of properties, so someone with, say, ten to twelve rentals, and only moderate financing, could be facing a tax increase of around £1,500 to £2,000. With landlords already being hit by various other costs, they are probably going to have to pass on some or all of the extra tax by raising rents.

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Incorporation

Incorporating an existing property portfolio may be too expensive from a tax perspective, but landlords may decide to acquire new properties through a company. A limited company structure means full relief for finance costs, but will often not be beneficial taxwise when it comes to extracting the property income from the company.

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Be warned that the basic and higher tax rates on dividend income are also being increased by two percentage points.

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The government’s guide to renting out property can be found here.

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For further information, contact LFB on 01480 445490