Inheritance Tax (IHT) can create a significant tax liability for business owners if not planned properly. Shares in a private limited company form part of a person’s estate for IHT purposes, but valuable reliefs may be available where conditions are met.
This guide explains how IHT applies to private company shares, when Business Relief is available, how shares are valued, and key planning considerations.
What Is Inheritance Tax in the UK?
Inheritance Tax is charged on the value of a person’s estate at death.
Key points (2025):
- Standard IHT rate: 40%
- Nil-rate band: £325,000
- Residence nil-rate band (where applicable): up to £175,000
- Assets are generally valued at market value at the date of death
Shares in a private company are included in the estate unless relieved.
Are Private Company Shares Subject to Inheritance Tax?
Yes. Shares in a private company are chargeable assets for IHT purposes.
However, qualifying shares may benefit from Business Relief (BR), which can significantly reduce or eliminate the IHT liability.
Business Relief on Private Company Shares
Business Relief (formerly Business Property Relief) applies to certain business assets, including shares in unlisted companies.
Rates of Business Relief
- 100% relief – shares in qualifying unlisted/private companies
- 50% relief – certain business assets or controlling holdings in listed companies
Most UK private limited companies may qualify for 100% Business Relief, subject to conditions.
Conditions for Business Relief
To qualify for Business Relief on private company shares:
1. The Company Must Be Mainly Trading
The company must not be mainly engaged in investment activities such as:
- Property letting
- Holding investments
- Dealing in securities
HMRC assesses the overall balance of activities, including income, assets, management time, and business purpose.
2. Minimum Ownership Period
- Shares must generally have been owned for at least two years before death.
3. Business Status at Death
- The company must be trading at the time of death.
- Businesses that ceased trading shortly before death may still qualify in limited circumstances.
Excess Cash and Business Relief
Cash or investments held within the company that are not required for current or future trading purposes may be excluded from Business Relief.
This can reduce the amount of relief available and increase the taxable value of the shares.
Valuation of Private Company Shares for IHT
Private company shares are valued at their open market value at the date of death.
HMRC considers:
- Profitability and future earnings
- Net asset value
- Dividend history
- Control and voting rights
- Share transfer restrictions
Minority Shareholdings
Minority interests often attract valuation discounts due to lack of control and marketability, which can reduce IHT exposure.
Lifetime Transfers of Private Company Shares
Gifts of Shares
- Usually treated as Potentially Exempt Transfers (PETs)
- No IHT if the donor survives 7 years
- Taper relief may apply after 3 years
Business Relief on Lifetime Gifts
Business Relief may apply immediately to qualifying lifetime transfers, potentially reducing the chargeable value to nil.
Capital Gains Tax After Death
On death:
- Shares are rebased to market value
- No CGT is payable at death
If beneficiaries later sell the shares, CGT may apply on any post-death increase in value.
Inheritance Tax Planning for Business Owners
Common planning strategies include:
- Maintaining trading status
- Reviewing excess cash regularly
- Gifting shares early
- Using shareholder agreements
- Considering life insurance written in trust
All planning should be reviewed periodically and documented carefully.
HMRC Scrutiny and Risk Areas
HMRC frequently reviews:
- Trading vs investment status
- Share valuations
- Excess cash levels
- Artificial arrangements aimed at securing relief
Professional valuations and evidence are essential.
Example: IHT on Private Company Shares
Scenario:
- Value of shares: £1,000,000
- Shares qualify for 100% Business Relief
IHT payable: £0
Without Business Relief:
- IHT at 40% = £400,000
Frequently Asked Questions (FAQs)
1. Are private company shares subject to Inheritance Tax?
Yes. They form part of the estate, but qualifying shares may benefit from Business Relief, reducing IHT by up to 100%.
2. Do all private companies qualify for Business Relief?
No. The company must be mainly trading. Investment-focused companies generally do not qualify.
3. How long must shares be owned to qualify for Business Relief?
Shares must usually be owned for at least two years before death.
4. Does excess cash affect Business Relief?
Yes. Cash not required for trading purposes may be excluded from Business Relief.
5. How are shares valued for IHT?
They are valued at open market value, considering profitability, assets, control, and restrictions.
6. Are minority shares treated differently?
Yes. Minority shareholdings often attract valuation discounts.
7. Is IHT payable on lifetime gifts of shares?
Usually no, if the donor survives 7 years. Business Relief may apply immediately.
8. Does Capital Gains Tax apply on death?
No. Assets are rebased to market value. CGT may apply if beneficiaries sell later.
Final Thoughts
Need expert advice on Inheritance Tax and Business Relief? Inheritance Tax planning for private company shares can be complex, particularly where Business Relief, valuations, and HMRC scrutiny are involved. A professional review can help ensure reliefs are claimed correctly, risks are minimised, and your business and family wealth are protected for the future.
Disclaimer: This article is provided for general information purposes only and does not constitute tax, legal, or financial advice. Inheritance Tax rules and reliefs can change, and their application depends on individual circumstances. You should seek professional tax advice before taking any action based on the information contained in this article.