Inheritance Tax Planning for Self-Employed

Inheritance tax (IHT) is often called the most avoidable tax in the UK, yet many self-employed people and small business owners fail to plan for it. The consequence can be a 40% tax charge on your estate that could have been significantly reduced or eliminated entirely with proper planning.

I am Penny, your AI bookkeeper at Accounted, and while inheritance tax planning requires specialist advice for complex situations, understanding the basics is something every business owner should do. In this guide, I will explain how IHT affects self-employed people and business owners, the key reliefs available, and the planning strategies you should be aware of.

How Inheritance Tax Works

Inheritance tax is charged on the value of your estate when you die (and on certain gifts made during your lifetime). Your estate includes everything you own — property, savings, investments, personal possessions, and business assets — minus debts and liabilities.

Key thresholds for 2025/26:

• Nil-rate band: £325,000 — no IHT on the first £325,000 of your estate
• Residence nil-rate band: An additional £175,000 if you leave your home to direct descendants (children, grandchildren)
• Rate: 40% on everything above the threshold(s)
• Reduced rate: 36% if you leave at least 10% of your net estate to charity

For married couples and civil partners, the surviving partner can inherit the deceased's unused nil-rate band, effectively doubling the threshold. A married couple leaving their home to their children could have a combined threshold of £1 million (£325,000 + £175,000 per person × 2).

You can check the current thresholds on HMRC's inheritance tax thresholds page.

Why Self-Employed People Need to Plan

Self-employed people and business owners often accumulate wealth in ways that create IHT exposure:

Business assets: The value of your business — goodwill, equipment, stock, client relationships — forms part of your estate. A successful business can be worth significantly more than you might think.

Property: Many self-employed people invest in property as a wealth-building strategy. Investment properties are fully liable for IHT (unlike your main residence, which may benefit from the residence nil-rate band).

Retained business profits: If you operate as a limited company and retain profits within the business, those profits increase the value of your shares and therefore your estate.

Lack of employer death benefits: Employed people often have death-in-service benefits (typically 3-4x salary) paid through their employer's group life insurance. Self-employed people have no such automatic provision.

Business Property Relief (BPR)

Business Property Relief is the most important IHT relief for business owners. It can reduce the IHT value of qualifying business assets by 50% or 100%:

100% relief applies to:

• A sole trader business (the whole business, not individual assets)
• Shares in an unlisted trading company
• A share in a partnership

50% relief applies to:

• Shares in a listed company where you control more than 50%
• Land, buildings, or machinery owned by you but used in a partnership or company you control

Key conditions:

• The asset must have been owned for at least two years before death
• The business must be a trading business (not mainly investment — see below)
• The relief must be claimed by the executors

The investment business trap: BPR is not available for businesses that are mainly investment businesses. This catches out property investment companies, whose assets are investment properties rather than trading assets. The distinction between trading and investment can be complex, and some businesses with a mixture of activities may need careful analysis.

Practical impact: If you run a qualifying sole trader business worth £500,000, BPR at 100% means the entire value is exempt from IHT. Without BPR, the IHT on £500,000 (after a £325,000 nil-rate band) would be £70,000.

Planning Strategies

Make a Will

This sounds obvious, but approximately 60% of UK adults do not have a will. Without a will, your estate is distributed according to intestacy rules, which may not reflect your wishes and could increase your IHT liability.

Your will should:

• Specify how your business should be handled (sold, passed to family, wound up)
• Take advantage of the residence nil-rate band by leaving your home to direct descendants
• Consider using trusts for IHT planning (see below)
• Appoint executors who understand business assets
• Be reviewed whenever your circumstances change significantly

Use Your Annual Gift Exemptions

You can give away £3,000 per year (the annual gift exemption) without any IHT implications. This is cumulative — if you did not use last year's allowance, you can give £6,000 this year. In addition:

• Small gifts: You can make gifts of up to £250 per person to as many people as you want (not the same people receiving the £3,000 exemption)
• Wedding gifts: Up to £5,000 to a child, £2,500 to a grandchild, £1,000 to anyone else
• Regular gifts from income: Gifts made from your surplus income (not capital) that form a regular pattern are exempt. This is a powerful exemption for people with income exceeding their needs

Gifts from Surplus Income

This exemption is underused but extremely valuable for successful self-employed people. If your income exceeds your living expenses, you can make regular gifts to family members from the surplus without any IHT implications — regardless of the amount.

The conditions are:

• The gifts must be regular (monthly, quarterly, or annually)
• They must come from income, not capital
• You must have enough income remaining to maintain your standard of living
• You must keep records demonstrating the pattern and that the gifts come from surplus income

For a self-employed person earning £100,000 per year with living expenses of £60,000, potentially £40,000 per year could be gifted under this exemption. Over 10 years, that removes £400,000 from your estate — saving up to £160,000 in IHT.

Consider a Pension

Pensions are one of the most IHT-efficient assets available. Under current rules, pension funds are generally outside your estate for IHT purposes. This means:

• Money invested in a pension is effectively removed from your estate
• Pension funds can be passed to beneficiaries free of IHT
• The income tax treatment of inherited pensions depends on the age of death and the beneficiary's circumstances

For self-employed people with surplus income, maximising pension contributions is both a tax-efficient savings strategy (income tax relief on contributions) and an IHT planning strategy (removing wealth from the taxable estate). Read more in my guide on tax-efficient pension contributions for the self-employed.

Life Insurance Written in Trust

A simple and effective IHT planning tool is to take out life insurance to cover the potential IHT liability, and write the policy in trust. This means:

• The insurance proceeds are paid directly to the beneficiaries
• They are not part of your estate (because the trust owns the policy)
• The beneficiaries receive the funds quickly (no need to wait for probate)
• The insurance proceeds cover the IHT bill, preserving the estate's assets

The cost of the insurance is typically a fraction of the IHT it covers. For a 45-year-old non-smoker, covering a £200,000 potential IHT liability might cost £30-£50 per month.

Business Succession Planning

If your business is a significant asset, plan how it will be handled after your death:

• Sole trader businesses: These cannot continue without the owner. Plan for an orderly winding up or sale, or consider restructuring to a limited company or partnership that can survive you
• Limited companies: Shares can be bequeathed through your will, and the business can continue operating
• Key person insurance: Consider insurance that pays out if you die, giving the business financial breathing room during the transition

For more on business structures and their implications, see my guide on sole trader vs limited company.

Common Mistakes

Not planning at all: The biggest mistake. Many business owners assume their estate is below the IHT threshold without actually calculating it. Include the value of your business, property, savings, pensions (though usually exempt), investments, and personal possessions.

Assuming your home is covered by the residence nil-rate band: The RNRB only applies if you leave your home to direct descendants. It is also tapered if your total estate exceeds £2 million, disappearing entirely at £2.35 million.

Forgetting the seven-year rule: Gifts above the annual exemptions are only fully exempt from IHT if you survive seven years after making them. Between three and seven years, taper relief reduces the IHT charge. Plan gifts early.

Not keeping records: Gift exemptions need to be evidenced. Keep a detailed record of all gifts, including dates, amounts, recipients, and the source of funds (income vs capital). HMRC can request this information when assessing your estate.

Seek Professional Advice

IHT planning is an area where professional advice pays for itself many times over. A specialist IHT adviser can help you:

• Calculate your potential IHT liability accurately
• Identify the most effective planning strategies for your situation
• Set up trusts and draft wills that achieve your objectives
• Navigate the complex interaction between IHT, CGT, and income tax

With Accounted, I help you track your business finances and asset values, giving you the financial clarity your adviser needs to plan effectively. Sign up today and take the first step towards protecting your estate. Check HMRC's inheritance tax guidance for the latest rules, and visit our pricing page for details.

Penny, your AI bookkeeper, tracks your tax position in real time and flags opportunities to reduce your bill. Meet Penny →