Business owners: how will you fund your inheritance tax liability

The changes to Business Property Relief (BPR) which took effect from 6 April 2026 mean many business owners now face a new, and potentially significant, inheritance tax (IHT) exposure on death.

Funding that liability can create liquidity challenges. While responsibility for paying IHT lies with the personal representatives of the deceased, they may need the support of the company’s directors to raise and release funds at the right time. It’s therefore crucial that business owners and corporate directors take practical steps to prepare.

Step one: valuation and assessment of liability

Before any funding strategy can be developed, the potential IHT liability needs to be assessed and kept under review. This involves valuing the business and the relevant shareholdings.

For non-listed companies, valuation is rarely straightforward. Different methodologies may apply depending on the nature of the business, often resulting in a range of possible values. That range will directly affect the level of IHT exposure and, ultimately, the funding required. Any valuation will need to be agreed with HMRC.

Where a shareholder holds a minority interest, valuation discounts may apply. These can be significant and may help reduce overall IHT exposure.

Step two: consider mitigation options

Once the likely exposure is understood, it’s sensible to consider whether steps can be taken to reduce the taxable value or improve the availability of reliefs.

For some family businesses, this may involve passing value to the next generation or restructuring shareholdings in a tax-efficient way. However, these options aren’t suitable for everyone: there may be no next generation wishing to be involved in the business, affordability constraints or a reluctance to give up control.

Step three: develop a strategy for funding inheritance tax

Where an IHT liability is expected, there are several potential ways to fund it. The right approach will depend on a number of factors, including the business, its shareholders and cash requirements.

7 ways to fund an inheritance tax liability

1. Life insurance

Life insurance is one of the most straightforward ways to provide liquidity. A policy can be taken out on the shareholder, with the sum assured calculated to cover the anticipated IHT exposure.

To be effective, the policy should be written in trust so the proceeds fall outside the deceased’s estate and don’t attract IHT. Careful consideration also needs to be given to who owns the policy and pays the premiums – whether the shareholder personally or the company – as this can have different tax consequences.

Life insurance is not always available or affordable, particularly where age or health conditions result in high premiums.

2. Cash reserves

Some companies choose to self-insure by retaining cash or extending overdraft facilities that could fund a loan, share buyback or dividend payment to support the payment of IHT.

This approach offers flexibility, as retained funds remain available for business use. However, where significant cash is accumulated and can’t be evidenced as required for business purposes – or where investment assets are held instead of deploying cash in the trade – there’s a risk that the company may lose its trading status for the purposes of BPR or business asset disposal relief. Any retained cash should therefore be clearly justified as necessary for the trade.

3. Share buyback

A company may buy back the deceased shareholder’s shares, providing liquidity to the estate to meet the IHT liability while allowing remaining shareholders to consolidate ownership.

The tax treatment depends on whether the transaction meets the conditions set out in the Corporation Tax Act 2010. If those conditions are met, the payment received by the estate (less the original subscription price) may be treated as capital receipt subject to capital gains tax. As the estate benefits from a probate value uplift, this can substantially reduce or eliminate the chargeable gain.

If the conditions aren’t met, the excess of the purchase price over the original subscription price is treated as a distribution and taxed as dividend income, which may result in a higher tax charge.

In practical terms, the company must also have sufficient distributable reserves to fund the buyback. Insurance can assist in making this option affordable.

4. Dividends

Where a share buyback is not appropriate, a dividend may be declared to provide funds to the estate, provided the company has adequate distributable reserves.

Dividends received by the estate are subject to income tax at the applicable dividend rate, and there’s no equivalent to the capital gains tax uplift to reduce the effective tax burden. Dividends are also paid to all shareholders of the relevant class, meaning it may not be possible to direct funds solely to the estate.

5. Company sale

A sale of the entire business crystallises value for all shareholders. While not suitable in every case, it can provide the estate with cash to meet the IHT liability.

From a tax perspective, a sale of shares gives rise to a chargeable gain. A sale is a disposal for capital gains tax purposes, but as with dividends, the estate benefits from a probate value uplift. Business asset disposal relief may be available to reduce the effective rate to 10% within lifetime limits.

In practice, however, a company sale is a significant undertaking. It requires willing buyers, due diligence and negotiation, and there’s no guarantee that a sale can be completed quickly enough to release funds in time to pay IHT. In addition, a proportion of the tax must be paid before a grant of probate can be obtained, which is itself required to complete the sale.

6. Share sale

Instead of a buyback, the estate may sell the deceased’s shares directly to the remaining shareholders. This achieves a similar commercial outcome but with different tax consequences.

As with a company sale, a chargeable gain may arise on the difference between the probate value and the sale price, with potential access to business asset disposal relief. The purchasing shareholders use their personal funds, or borrowed money, to acquire the shares and the purchase price isn’t deductible for tax purposes.

This option may be preferable where the company lacks sufficient distributable reserves for a buyback, or where the conditions for capital treatment can’t be satisfied. Cross-option agreements put in place during the shareholder’s lifetime can help ensure an orderly transfer, giving both the estate and the remaining shareholders reciprocal rights to sell and buy the shares at an agreed or formula-based price.

7. Paying by instalments

IHT is normally due within six months of the end of the month of death, and part must be paid before probate is granted.

However, any IHT payable on assets that qualify for BPR can be paid in 10 equal annual instalments, which are interest free. This doesn’t reduce the tax, but it can significantly ease cash-flow pressure and provide time to arrange other funding options.

Start planning ahead

As these options show, there’s no one-size-fits-all solution. Planning is key to ensuring that successful businesses aren’t put at risk by the death of key stakeholders.

The most effective solution will depend on the company, its shareholders and long-term objectives. Careful planning can make the difference between a manageable IHT liability and a disruptive funding exercise.