SMEs unclear on inheritance tax relief

Only 14% of SME leaders whose businesses were modelled as fully eligible for Business Relief correctly identified that they qualified, according to new research highlighting widespread confusion around inheritance tax succession planning.

The research from savings platform Flagstone surveyed 500 SME owners, company directors, and C-level executives to assess their understanding of Business Relief and the rule changes introduced in April 2026.

Business Relief allows qualifying business assets to be passed on with reduced or no inheritance tax liability. From April 2026, 100% relief is capped at £2.5m for qualifying business or agricultural property. Assets above that threshold may qualify for 50% relief, meaning heirs may face inheritance tax on value above the cap.

Flagstone’s findings suggest that many SME leaders do not have a clear view of whether their company qualifies. Among the 327 SMEs modelled as fully eligible for Business Relief, only 14% correctly identified that their business qualified. A further 44% of respondents said they did not know whether their business qualified at all.

Uncertainty also runs through the qualifying criteria. When asked which criteria typically qualify a business for Business Relief, 42% of respondents said they did not know. The most common misconception was that family-run businesses automatically qualify, selected by 21% of respondents. In practice, ownership structure alone does not determine eligibility. Qualification depends on how the business trades and the nature of its assets.

Katie Horne, savings expert at Flagstone, said: “Business Relief is one of the most valuable Inheritance Tax protections for business owners, yet our research shows many SMEs are unsure whether they qualify or may be working from assumptions that don’t reflect the latest rules.

“Family businesses may want to review their succession plans, as under the new Inheritance Tax rules heirs could face unexpected tax burdens.

“Tools like an Inheritance Tax calculator, alongside guidance from a financial adviser, can help SME leaders better understand potential liabilities and plan ahead.”

The survey exposed several specific misunderstandings. Eleven per cent of respondents believed any business owned for more than two years automatically qualifies for Business Relief. While the two-year ownership requirement is necessary, the business must also be a trading business. Ten per cent believed business assets worth more than £2.5m still receive full relief, while 8% believed investment holding companies qualify and 7% believed property letting businesses qualify. Investment businesses and property letting businesses are excluded from Business Relief.

The consequences can be substantial because succession planning often requires long lead times. Decisions about ownership transfer, share structures, trusts, gifts, and family governance cannot be made effectively if leaders misunderstand the tax exposure attached to passing on a business.

Family-owned companies may be especially exposed where most wealth is tied up in trading shares rather than liquid assets. If heirs face an unexpected inheritance tax liability, they may need to draw funds from the business, sell shares, borrow, or restructure ownership at a difficult moment. In some cases, tax uncertainty can affect investment decisions before succession takes place.

The findings also expose a wider governance weakness inside many owner-managed companies. Trading performance, cash flow, recruitment, customer growth, and day-to-day operations often absorb management attention, while succession planning remains informal. That leaves companies vulnerable when tax rules change or when leadership transitions arrive suddenly through illness, death, retirement, or family disagreement.

Financial advisers, accountants, and lawyers are likely to see increased demand as business owners reassess their position under the new regime. Awareness remains uneven, however. Some leaders may be relying on assumptions formed under old rules, while others may be unaware that they qualify for relief that could materially reduce succession risk.

The new inheritance tax environment does not remove Business Relief, but it makes planning more complex for businesses above the threshold. SME leaders now need clarity on whether the business qualifies, which assets are included, what value may fall above the cap, and how succession plans would operate under current rules. Without that work, families may make ownership decisions without understanding the tax exposure created by the transfer.