Why might the addition of pensions into an estate raise concerns over business succession?

Government reforms have led people to pay more Inheritance Tax (IHT) than in previous years, spelling potential problems for business succession.

IHT receipts have reached a record £2.3bn for April to June 2026, up by £96 million from the same period last year.

With unused pensions due to form part of the taxable estate and the cap on Business Property Relief (BPR), executors are likely to face even steeper IHT bills.

Where cash is short and business assets are sold to pay tax bills, there is an increased risk of failed or disrupted business succession.

Taxable unspent pensions and the BPR cap: How do they interact?

While taxable pensions and a cap on BPR relief might seem separate, their implications can overlap when a business is passed between generations.

Arriving on 6 April 2027, unspent pension funds and death benefits are set to be included in the value of an estate, thereby subjecting them to potential IHT charges.

As of April 2026, qualifying business assets exceeding the £2.5 million BPR allowance will generally receive only 50 per cent IHT relief, rather than full tax exemption.

Where pensions are increasing the value of a taxable estate and BPR relief is less generous, executors might be left with a substantially higher IHT bill to grapple with.

How does this impact business succession planning?

Pensions have traditionally been used as a part of succession planning, helping business owners keep a large chunk of wealth outside their taxable estate.

This is especially true in the case of family-run businesses where your succession plans may involve passing most or all of the business to your direct descendants.

Knowing how the different parts of your estate interact allows you to be more confident when determining your succession strategy and preserving values.

When pensions were outside of the scope for IHT, your succession strategy may have ignored them or seen them as a backup fund to cover IHT costs.

Now many business owners face steeper bills with fewer resources to cover them.

Increased IHT liabilities might cause problems where wealth is tied up in business assets rather than cash.

Where important business assets are sold to pay the bill, succession plans and the operations of family-run businesses can be disrupted.

How can business succession planning avoid this?

Careful succession planning seeks to address cash flow problems caused by added IHT, ensuring businesses remain intact when transitioning between generations.

This will likely require business owners to alter their approach to their pensions, as this wealth will no longer be tax-free and might not be sufficient to pay IHT bills.

Pensions might also no longer be effective for wealth transfer, so it might be worth drawing them earlier to spend during retirement.

Instead of being asset rich and cash poor, business owners should focus on gradually extracting cash from the company so that future tax bills can be paid without disrupting operations.

After the IHT bill is estimated, families might consider using life insurance policies written into trusts as the cash flow boost needed to pay IHT liabilities.

Families looking to incorporate life insurance policies into trusts should reach out to Prime Accountants Wealth Planning services for expert assistance.

Speak to an accountant

Our accountants can update your succession plans in line with the upcoming changes.

We can estimate your future IHT exposure and plan around it, identifying cash flow risks and reviewing how much BPR your family business is entitled to.

Rather than leaving executors scrambling to pay bills, we can create a tax funding plan that accounts for higher IHT exposure and potential cash shortages.

If you are worried your business might be disrupted by hefty IHT bills, get in touch with an expert today to safeguard your succession.