The £1 million cap arrives in April and most owners have not done the arithmetic

Figures relate to tax year 2025-26 (UK) · 2025 (US)

For decades business property relief had no ceiling. A qualifying trading company passed on death free of inheritance tax whatever it was worth, which is why so much family business planning rests on it.

That ends on 6 April 2026. A combined £1 million allowance attracts full relief, and everything above it drops to 50 per cent. On a company worth a few million, a nil bill becomes a seven figure one payable within months of a death.

If you hold an American passport there is a second layer underneath. America has never offered an equivalent relief. It values the company in full, gives nothing back for the British exemption, and that exposure does not change in April either.

Key takeaways

• Full business property relief is capped at £1 million from April 2026.
• Value above the cap gets 50 per cent relief, an effective 20 per cent rate.
• The allowance is per person and does not pass to a surviving spouse.
• The business must trade rather than hold investments.
• Surplus cash can push part of the value outside the relief.
• Premises you own personally attract the lower rate.
• America has no equivalent relief and taxes the full value.

What is business property relief?

It is an inheritance tax relief that reduces the value of qualifying business assets, usually to nil. According to GOV.UK guidance, it applies to an interest in a trading business, to unquoted shares in a trading company, and at a lower rate to some land and machinery used by one.

The relief exists so that nobody has to break up or sell a family business to pay tax when its owner dies. Without it, an illiquid company worth several million would generate a bill the estate could not meet.

It applies automatically once the conditions are met. Nobody claims it, but the executors still have to show it applies. That evidential burden falls at the worst possible moment, which is why the groundwork matters while the owner is alive.

What changes in April 2026?

The relief loses its unlimited character. From 6 April 2026 a combined allowance of £1 million applies across business and agricultural property at full relief, and value above that allowance attracts relief at 50 per cent rather than 100 per cent.

Fifty per cent relief on the excess gives an effective rate of 20 per cent above the cap. For a company worth several million, that turns a nil bill into a substantial one payable within months of a death.

The allowance is per person, not per business. It does not pass between spouses the way the main nil rate band does. That makes the ownership split between a couple far more important than it used to be.

What counts as a trading business?

Business property relief requires a business that is not wholly or mainly dealing in securities, land or investments. The test looks at the business as a whole, weighing turnover, assets, time spent and profit to decide whether trading or investment predominates.

It is a question of degree, not a bright line. That is where most disputes start. A trading company sitting on a large pile of surplus cash can find part of its value excluded as an investment asset rather than a trading one.

A property letting business almost never qualifies, however actively it is run. Furnished holiday lets were the usual argument, and the removal of that regime has made the position harder rather than easier.

What happens to a company with excess cash?

Part of its value can drop out of the relief. Cash held well beyond the needs of the trade looks like an investment rather than a business asset, and business property relief does not cover the excepted part.

There is no fixed percentage that marks the line. HMRC looks at what the business actually needs for working capital, for known commitments and for identified plans, and treats the rest as surplus.

Document the purpose of any large balance as it builds. A board minute recording a planned acquisition is worth far more than an explanation written years later.

Do AIM shares still work?

They can, because shares quoted on AIM count as unquoted for business property relief, and portfolios built around qualifying AIM companies have been a common planning route. The April 2026 changes reduce the relief on them to 50 per cent.

For an American holder there was always a second problem. An AIM portfolio run through a managed service often holds its positions in a structure America treats unfavourably, and the shares themselves are foreign securities with their own reporting.

Our guide to the ISA and PFIC problem explains why pooled British investments cause trouble. Direct holdings avoid the worst of it, though the estate tax exposure remains.

Does the relief cover the trading premises?

Often at the lower rate rather than the full one. Where you personally own the building the company trades from, the relief runs at 50 per cent rather than 100 per cent, which surprises owners who assumed everything qualified alike.

Holding the property inside the company instead usually attracts the higher rate. That comes with other consequences, so the choice is rarely driven by this point alone.

Review where the premises sit before the April 2026 cap arrives. The split between personal and company ownership matters more under the new rules.

How long must you have owned it?

Two years, as a general rule, and the clock runs on the specific asset rather than on the business generally. Shares acquired last year do not qualify even where the company has traded for decades under the same family.

Replacement provisions can preserve the clock where you sell one qualifying business and buy another. Those rules are narrow and depend on the timing of the replacement, so they need checking rather than assuming.

Inherited shares can carry a shorter period where they came from a spouse. That gives couples another reason to review their ownership split well ahead of time.

Does it interact with the main nil rate band?

The two run separately and both can apply. Business property relief takes qualifying value out of the estate first, and the nil rate band then covers a slice of whatever remains chargeable.

The new £1 million allowance behaves differently from the nil rate band in one important way. It does not pass to a surviving spouse unused, so a couple can lose one allowance entirely by leaving everything to each other.

That single point is driving most of the will reviews we are seeing this year.

What if the business is sold before death?

The relief disappears with it, because you now hold cash or investments rather than a business. A sale converts a fully relieved asset into a fully chargeable one overnight, and the inheritance tax exposure jumps accordingly.

Reinvesting in another qualifying business can restore the position, subject to the replacement rules and their timing. Sitting on the proceeds does not.

America is indifferent either way, since it taxed the full value regardless. For the American estate the sale changes the asset, not the exposure.

A worked example

The figures below are illustrative. They use round numbers so you can follow each step and substitute your own.

Patricia is American, lives in Oxford and owns a manufacturing company worth £4 million. She has held it for twenty years and it trades genuinely, so it qualifies in full.

Under the new rules the first £1 million gets full relief. The remaining £3 million gets relief at 50 per cent, leaving £1.5 million chargeable at 40 per cent. Her British inheritance tax on the company is about £600,000.

America values the whole £4 million in her estate, because it has no equivalent to business property relief. With the estate well above her exclusion, the American tax on that value could run to roughly £1.6 million at the top rate.

The British tax paid should credit against the American charge under the estate tax treaty, which helps considerably. What it cannot do is relieve the £1 million Britain exempted outright, because no British tax was ever paid on that slice.

Why does the exemption create a problem?

Because a credit relieves tax you actually paid. Where Britain exempts value entirely, there is no British tax on that value, so nothing exists to set against the American charge on the same assets.

The better the British relief, the worse the American outcome in relative terms. An owner who qualifies for full relief on everything gets the largest British saving and the smallest credit, which is a genuinely perverse result.

In our practice this is the single most under-appreciated feature of cross-border business succession. The British plan looks complete, and the American exposure sits underneath it untouched.

The two systems compared

The table sets out where each stands on the same company. Only one of them offers relief for the fact that it is a business.

Does the estate tax treaty help?

It does, but only where both countries actually tax the same asset. The treaty allocates taxing rights and gives credit for tax paid, which resolves double taxation on the chargeable slice above the new cap.

What it cannot do is manufacture relief where one country has exempted something outright. America taxes the exempt portion once, and the treaty cannot reduce a charge that nothing duplicates.

Our guide to US estate tax for UK investors covers the thresholds and the mechanics. The exposure depends heavily on whether the owner is a citizen or not.

Does it matter if the spouse is not American?

A great deal, and in both directions. Britain exempts transfers between spouses where both are domiciled or long-term resident here. The unlimited American marital deduction applies only where the surviving spouse holds citizenship.

A qualifying domestic trust can preserve the deferral where the survivor is not a citizen. Somebody has to set it up properly and administer it for years afterwards. It is not something an executor can create after a death.

Our guide to the marital deduction for a non-citizen spouse covers the structure. For a business owner it is usually the first thing to look at.

What about gifting the business during life?

Britain treats a lifetime gift attracting business property relief favourably, and the gift falls out of the estate entirely after seven years. America takes a different view, because it taxes lifetime gifts and death transfers under one unified system.

So a gift that fixes the British problem can bring the American one forward. Giving shares away uses your American lifetime exclusion immediately, rather than deferring the question to death.

Gift and estate tax share a single exclusion in America. Spending it early is sometimes right, but it should be a decision rather than a side effect of British planning.

How is the company valued?

On open market value in Britain and fair market value in America, which sound identical and are not applied identically. Both allow discounts for a minority holding and for a lack of buyers. The two systems weigh them differently.

Get a formal valuation rather than an estimate. Executors face two sets of questions about the same number. A valuation prepared at the time answers both.

Currency matters as well. The American figure converts at the rate on the date of death, so a weak pound at the wrong moment can change the exposure substantially.

What records should the owner keep?

Accounts for at least the last five years, a note of what the company actually does, evidence of the ownership period, and any valuation obtained. Those four together let an executor establish that the relief applies.

Keep a short written record of the trading activity each year. Where a company has accumulated cash or bought property, contemporaneous notes explaining why are far more persuasive than an explanation constructed later.

Executors do not know the business. Everything you leave unwritten becomes their problem at the point they can no longer ask you.

How to plan around it

1. Confirm the business genuinely trades rather than holds investments.
2. Check the ownership period on each specific holding.
3. Value the company and keep the valuation on file.
4. Model the British position against the new £1 million cap.
5. Model the American estate exposure on the full value separately.
6. Review how the shares are split between spouses.
7. Check whether a qualifying domestic trust is needed.
8. Revisit the plan whenever the company changes shape.

Mistakes and penalties we see with business property relief

The first is assuming the British exemption solves the whole problem. It solves the British half and leaves the American half fully exposed, often on a larger figure.

The second is letting surplus cash build inside a trading company. It can turn part of the value into an excluded investment asset without anyone noticing it happened.

The third is transferring shares between spouses without checking the ownership clock. The two year period can restart, and relief is lost on a death inside that window.

The fourth is gifting shares to fix the British position and spending the American lifetime exclusion by accident.

How US UK Tax Accountants helps

We model both estates side by side rather than one at a time, test the trading status against the current activity, and work out where the new cap leaves the British bill. Then we look at the American exposure on the full value, and at what you can still do about it.

Where a British plan already exists, we check what it does to the American side before you sign anything. Our US federal return service covers the filing side.

If you own a British business and hold an American passport, get in touch. The April 2026 cap is reason enough to look at this again before it arrives.

Last reviewed 9 October 2026. This article is general information and not personal tax advice. Every business turns on its own facts, so take advice on yours before acting.