Pay Less Inheritance Tax with Business Relief

The government has seen a nearly 10% increase in the amount of inheritance tax (IHT) paid between April to July 2023 compared to the same period last year. To avoid leaving a hefty bill for your beneficiaries, it’s important to plan ahead. The Times wrote about one strategy to reduce your IHT bill, by investing in shares that qualify for business relief.

What is Inheritance Tax?

Inheritance tax is a tax payable on the estate of a deceased person. It is calculated at a rate of 40% on the portion of the estate that exceeds the individual’s allowance. Currently, each individual has an allowance of £325,000, meaning that any amount above this threshold is subject to inheritance tax. However, there are additional allowances for leaving property to children or grandchildren, with an extra allowance of £175,000. Married couples and civil partners can effectively double their allowance to £1 million.

Why is the Number of Households Liable for Inheritance Tax Increasing?

While only 4% of households are currently liable for inheritance tax, this number is increasing due to frozen allowances and rising house prices. The government has kept the allowances unchanged for many years, while house prices have surged. In the UK, more than 700,000 homes are worth over £1 million.

Ways to Avoid Inheritance Tax

There are several methods to avoid or reduce inheritance tax. One commonly mentioned approach is to give money away during your lifetime. If a gift is made at least seven years before death, it will not be subject to inheritance tax. Additionally, there are annual gifting allowances of up to £3,000, and additional gifts can be made for weddings or civil ceremonies. Regularly giving away money from excess income is also allowed, as long as it does not affect your own standard of living.

Using Business Relief to Reduce Inheritance Tax

For those who don’t want to give away large sums of money or are willing to take on more risk, business relief can be an effective option. Investing in shares of companies that qualify for business relief can eliminate inheritance tax liability after holding the shares for at least two years.

The benefit of this strategy is that the money is free from inheritance tax after just two years, compared to the seven-year period for gifts. Additionally, as the investor, you retain access to the invested money. Withdrawals or dividends can be taken since the investment is held in your name.

The Drawbacks and Risks of Business Relief

The downside of business relief is that qualifying companies are typically smaller and higher risk. These companies may be private firms or listed on the AIM market. There is a possibility of losing money if the chosen companies underperform or go bankrupt. Shares of smaller companies can also be more challenging to sell compared to larger ones listed on the FTSE 100 and FTSE 250 stock exchanges.

Another risk is the uncertainty of whether a company will maintain its qualification for business relief. There is a chance that a qualifying company may later list on the London Stock Exchange’s main market, which would result in the loss of its qualification for IHT relief.

How to Qualify for Business Relief?

Business relief is primarily intended to ensure the continuity of a business after the death of its owner. However, individuals who don’t own a business can still access this relief by investing in private companies likely to qualify. Shares in AIM-listed companies can be purchased directly, or a broader range of companies can be invested in through an AIM ISA or AIM portfolio.

Specialist investment companies also offer estate planning solutions by investing in a portfolio of privately-owned companies on behalf of investors. These investment companies may focus on specific sectors, such as renewable energy.


While inheritance tax liability affects a small percentage of households, the number is increasing due to stagnant allowances and rising house prices. To reduce your inheritance tax bill, careful planning is necessary. Utilising business relief by investing in qualifying shares can be a viable strategy, but it’s important to consider the risks associated with investing in smaller, higher-risk companies. Consulting a financial advisor or specialist investment company can help you navigate the complexities of business relief and ensure the most suitable approach for your circumstances.