Skip to main content
WUHLD
← Back to insights

Business Protection and Estate Planning: Integrating Life Insurance and Succession

· 18 min

Executive Summary

The April 2026 Business Property Relief reforms introduce a GBP 2.5 million cap on 100% relief, creating an effective 20% inheritance tax rate on qualifying business assets exceeding this threshold. This legislative change elevates the strategic importance of life insurance-backed protection arrangements while creating a critical coordination challenge: the legal structure of shareholder and partnership protection agreements directly determines whether BPR remains available. Buy-and-sell agreements creating binding contracts under IHTA84 Section 113 defeat relief entirely, while properly structured cross-option agreements preserve eligibility. The residence-based IHT regime from April 2025 adds complexity for internationally mobile business owners, extending worldwide asset exposure to long-term residents. Practitioners advising SME business owners require precise understanding of these interactions to deliver compliant, tax-efficient outcomes before the April 2026 implementation date.

1. Introduction

The Inheritance Tax landscape for business owners has undergone its most significant transformation in decades. From 6 April 2026, Business Property Relief at 100% applies only to the first GBP 2.5 million of combined agricultural and business property, with relief reduced to 50% on amounts exceeding this threshold.1 For a business owner whose qualifying shares are valued at GBP 4 million, this creates a potential IHT liability of GBP 300,000 on the GBP 1.5 million excess, where previously no liability would have arisen. The reform ends an era when trading businesses could pass between generations without tax erosion regardless of value.

This reform arrives against a backdrop of record protection claims. UK protection insurers paid GBP 8 billion in combined group and individual claims during 2024, with individual protection claims totalling GBP 5.32 billion, representing a 10% increase on the previous year.2 Yet despite this market performance, the FCA's Pure Protection Market Study indicates that 58% of UK adults lack pure protection products.3 For business owners, this protection gap is particularly concerning given the newly emerging IHT liabilities that will crystallise from April 2026.

For business protection specialists, the April 2026 changes create both urgency and complexity. Life insurance provides the liquidity to fund newly emerging IHT liabilities, but the manner in which protection arrangements are structured determines whether BPR remains available in the first instance. An improperly documented shareholder protection arrangement could convert a fully relieved asset into a fully taxable one, multiplying the insurance requirement while destroying the very relief it was intended to preserve. The financial stakes are material: a structuring error that defeats BPR on a GBP 3 million shareholding could increase IHT liability from GBP 100,000 to GBP 1.2 million.

The residence-based IHT regime, operational from 6 April 2025, adds further dimensions for internationally mobile business owners. Long-term UK residents face worldwide asset exposure regardless of domicile status, fundamentally changing planning assumptions for business owners with non-UK assets or international corporate structures.4

This article provides advisors with a technical framework for navigating these interconnected challenges, examining the legal distinctions that determine BPR eligibility, the tax treatment of different protection products, and the trust structures that ensure IHT efficiency.

2. The Business Protection Landscape

Business protection insurance addresses three distinct risk categories, each with different technical considerations and tax treatments.

Key Person Insurance

Key person insurance protects a business against financial losses arising from the death or critical illness of an individual whose contribution is material to the company's trading performance. The policy is owned by the company, with the company named as beneficiary. Proceeds are intended to compensate for lost revenue, recruitment costs, or temporary profit reduction during the transition period following an unexpected death or illness.

The tax treatment of key person insurance is governed by HMRC's Business Income Manual. BIM45525 establishes that premiums are deductible only where the sole purpose is a trade purpose of meeting loss of trading income, and the policy is term insurance providing cover against death within the term.5 Whole life policies, endowment policies, and any insurance containing investment content constitute capital expenditure and are non-deductible. This distinction is fundamental: the type of policy determines both premium treatment and proceeds treatment.

BIM45530 identifies indicators of non-trade purpose that would deny deductibility: policies covering director-shareholders but not other key employees, benefits exceeding normal remuneration levels, and arrangements structured to protect a director's personal estate rather than business operations.6 Where premiums are properly deductible, proceeds received by the company are treated as trading income.

Shareholder and Partnership Protection

Shareholder protection and partnership protection arrangements address ownership continuity following an owner's death. The objective is to ensure surviving owners can acquire the deceased's interest while the estate receives fair value, enabling business continuation without external shareholders or disruptive forced disposal requirements. Without such arrangements, the deceased's shares pass to their estate and ultimately to beneficiaries who may have no interest in or aptitude for business involvement.

These arrangements typically involve life insurance policies that provide liquidity to fund the purchase, combined with legal agreements governing the transfer mechanism. The critical technical consideration is the form of agreement: the distinction between buy-and-sell arrangements and cross-option arrangements determines BPR eligibility and therefore the entire tax position.

The mechanics of shareholder protection typically involve each shareholder owning policies on the lives of other shareholders, with the sum assured reflecting the value of the shareholding to be acquired upon death. When a shareholder dies, the surviving shareholders receive policy proceeds that fund the purchase of shares from the estate.

Relevant Life Policies

Relevant life policies provide death-in-service benefits for employees, including directors, with significant tax advantages over group life arrangements for smaller companies. EIM15045 specifies the conditions: the policy must provide a capital sum payable on death of the insured under age 75, have no surrender value, restrict beneficiaries to individuals and charities, and not be taken out for tax avoidance purposes.7

Where these conditions are satisfied, employer premiums are corporation tax deductible as business expenses, no benefit-in-kind charge arises for the employee, and proceeds fall outside the scope of income tax, capital gains tax, and, when written in trust, IHT. For SME directors in particular, relevant life policies offer superior outcomes compared to group life schemes, which require minimum employee numbers and involve registered scheme constraints.

Group life schemes registered with HMRC are subject to the lifetime allowance regime and, from April 2027, the pension death benefit income tax treatment changes that form part of the pillar context. Relevant life policies fall outside registered scheme treatment, meaning benefits are not subject to these restrictions.

3. The Binding Contract Trap

The most consequential technical consideration in business protection planning is IHTA84 Section 113, which denies BPR where qualifying property is subject to a binding contract for sale.8 The application of this provision depends critically on whether the protection arrangement constitutes a binding contract. This statutory provision creates what practitioners commonly term the binding contract trap.

Buy-and-Sell Agreements

Buy-and-sell agreements create mutual obligations: upon a shareholder's death, the personal representatives must sell the shares and the surviving shareholders must purchase them. HMRC guidance in IHTM25292 confirms that such arrangements defeat BPR because the shares are subject to a binding contract for sale at the point of death.9

The manual identifies three requirements for a buy-and-sell agreement: the shares or partnership interest passes to personal representatives, the personal representatives are obligated to sell, and the surviving shareholders or partners are obligated to purchase. HMRC notes that these requirements are rarely satisfied in practice, but where they are, BPR is unavailable regardless of the business's trading character or the deceased's period of ownership.

The consequence is severe: a business owner whose shares would otherwise qualify for 100% BPR loses all relief if bound by a buy-and-sell agreement. Consider a GBP 3 million shareholding under the reformed regime: with BPR preserved, the first GBP 2.5 million attracts 100% relief and the remaining GBP 500,000 attracts 50% relief, generating IHT of GBP 100,000. If BPR is defeated by a binding contract, the entire GBP 3 million is chargeable, generating IHT of GBP 1.2 million. The structuring decision represents a twelve-fold difference in tax liability.

Cross-Option Agreements

Cross-option agreements preserve BPR because options, unlike obligations, are not binding contracts for Section 113 purposes. SVM111120 confirms that HMRC does not treat options as binding contracts where the exercise is discretionary.10 An option grants a right without creating an obligation; until exercised, no binding contract for sale exists.

A cross-option agreement provides two separate rights: a put option entitling the deceased's estate to require surviving shareholders to purchase the shares at a specified price or formula, and a call option entitling surviving shareholders to require the estate to sell. Critically, these options must be structured to run consecutively rather than concurrently. If both parties simultaneously hold exercisable options, the commercial effect approaches a binding contract, risking HMRC challenge.

The typical structure provides the estate with a put option exercisable within a specified period following death, followed by a call option for survivors if the estate does not exercise. A common configuration grants the estate 90 days to exercise its put option, with a subsequent 90-day window for survivors to exercise their call option if the put lapses.

Structuring Principles for Advisors

Advisors coordinating business protection arrangements must ensure that legal documentation is drafted by solicitors experienced in BPR-preserving structures. The following principles guide this coordination:

Option Exercise Periods: Put and call options should run consecutively with defined exercise windows. A common structure provides the estate 90 days to exercise its put option, followed by a 90-day call option period for survivors.

Valuation Mechanisms: Agreements should specify valuation methodology (independent valuation, formula-based calculation, or pre-agreed price with periodic reviews) to prevent disputes that could complicate option exercise.

Insurance Alignment: Policy sum assured should reflect anticipated valuation at exercise, accounting for business growth and regular review requirements. Annual reviews aligned with accounts preparation provide natural review points.

Trust Writing: Personal policies funding cross-option arrangements should be written in trust to ensure proceeds are available immediately and do not form part of the deceased's estate for IHT purposes.

4. Business Property Relief Reform Framework

The April 2026 reforms fundamentally alter BPR planning for business owners with significant qualifying assets.

The GBP 2.5 Million Allowance

From 6 April 2026, 100% BPR applies to the first GBP 2.5 million of combined agricultural and business property. Amounts exceeding this threshold qualify for 50% relief only.11 This creates an effective IHT rate of 20% on the excess: the 40% headline rate applied to the 50% not relieved. The allowance increased from the initial GBP 1 million proposed in the October 2024 Budget following significant representations from farming and business communities.

The allowance combines APR and BPR qualifying assets. A farmer with GBP 2 million of agricultural property and GBP 1 million of trading company shares has GBP 3 million of qualifying assets, exhausting the allowance and leaving GBP 500,000 subject to 50% relief only.

Quantified Impact Analysis

Consider a business owner who dies after 6 April 2026 with trading company shares valued at GBP 4,000,000, other assets of GBP 500,000, and nil-rate band and RNRB fully utilised by other assets.

Under the reformed regime:

  • First GBP 2,500,000 of shares: 100% BPR, nil chargeable value
  • Excess GBP 1,500,000: 50% BPR, GBP 750,000 chargeable
  • IHT at 40% on chargeable balance: GBP 300,000

Under the pre-reform regime, the entire shareholding would have qualified for 100% BPR, generating no IHT liability on the business assets. The GBP 300,000 difference represents the insurance requirement created by reform.

For a larger business, the impact is correspondingly greater. A GBP 10 million shareholding generates GBP 1.5 million IHT under the reformed rules: the GBP 7.5 million excess attracts 50% relief, leaving GBP 3.75 million chargeable at 40%.

Spousal Allowance Transfer

Unused BPR allowance transfers to surviving spouses or civil partners.12 If the first death occurred before April 2026, the survivor is treated as having full allowance available. This effectively provides couples with a combined GBP 5 million allowance for qualifying assets.

For business protection planning, this spousal transfer mechanism reduces urgency where both spouses hold qualifying assets and the first death transfers unused allowance. However, where only one spouse holds the business interest, or where the business value exceeds combined allowances, insurance requirements remain material.

AIM Share Treatment

Shares designated as not listed on recognised stock exchanges, including AIM-listed shares, currently qualify for 100% BPR subject to the two-year ownership requirement. From April 2026, such shares qualify for 50% relief only, regardless of the GBP 2.5 million allowance.13 AIM shares do not benefit from the allowance at all, attracting only 50% relief from the first pound of value.

A GBP 1 million AIM portfolio that would currently attract no IHT will generate GBP 200,000 IHT under the new rules, irrespective of other BPR-qualifying assets held. The economics of AIM IHT portfolios require fundamental reassessment.

Transitional Rules

Lifetime gifts made after 30 October 2024 are subject to the new rules if the donor dies within seven years after 6 April 2026.14 This prevents accelerated gifting strategies that might otherwise have stripped value from estates before implementation.

For business owners who made substantial gifts of qualifying business property between October 2024 and April 2026, the failed PET regime applies the new BPR rules if death occurs within seven years post-April 2026. Insurance to cover potential IHT on such gifts may be appropriate where seven years has not elapsed.

5. Policy Ownership and Trust Structuring

The ownership structure and trust arrangements for business protection policies determine IHT treatment of proceeds.

Company-Owned Policies

Where a company owns a policy on the life of a shareholder, proceeds received increase the company's asset base and therefore the value of shares for IHT purposes. This creates a circular problem: insurance intended to fund IHT liability increases the liability by inflating share value.

The US Supreme Court's 2024 decision in Connelly v United States addressed analogous issues under federal estate tax, holding that life insurance proceeds receivable by a corporation to fund share redemption are included in the gross estate.15 While UK and US regimes differ significantly, the principle that company-owned insurance inflates share value for estate purposes applies conceptually under both systems.

For shareholder protection purposes, personal ownership of policies combined with cross-option agreements avoids this inflation effect. Each shareholder owns policies on the lives of other shareholders, with proceeds payable to the surviving shareholder personally to fund the cross-option purchase.

Trust Writing Requirements

Policies owned personally should be written in trust from inception to ensure IHT efficiency. IHTM20012 confirms that if the deceased is both life assured and policy owner, proceeds form part of the estate and are subject to IHT.16 Trust writing removes proceeds from the estate, provides immediate liquidity without probate delays, and enables direction to intended beneficiaries.

Trust selection depends on flexibility requirements and beneficiary circumstances:

Bare Trusts: Simple structure with fixed beneficiaries. Proceeds belong absolutely to named beneficiaries from the outset. Suitable where beneficiaries are known and circumstances unlikely to change.

Flexible Trusts: Permit trustees to select beneficiaries from a defined class at claim. Useful where circumstances may change or multiple potential beneficiaries exist. Some insurers offer proprietary flexible trust forms designed for business protection scenarios.

Discretionary Trusts: Maximum flexibility but with periodic and exit charge implications for trust assets remaining in trust beyond ten years. Less commonly used for protection policies given the typical once-off benefit payment.

For relevant life policies, trusts are essential: proceeds must be paid to individuals or charities (not the employer company) to satisfy EIM15045 conditions, and trust writing ensures exclusion from the employee's estate.

6. Residence-Based Inheritance Tax Regime Implications

The Finance Act 2025 replaced the domicile-based IHT framework with a residence-based system from 6 April 2025.17 This affects business protection planning for internationally mobile business owners.

Long-Term Resident Definition

A long-term UK resident is an individual who has been UK tax resident for at least 10 of the previous 20 tax years. Such individuals are liable to IHT on worldwide assets, regardless of domicile status. The previous excluded property regime, which exempted non-UK situs assets for non-UK domiciliaries, no longer applies to long-term residents.

The 10/20 year test operates on a rolling basis, meaning residence status is assessed at the date of the chargeable event. An individual who was resident for exactly 10 of the previous 20 years becomes a long-term resident; one who was resident for 9 years remains outside long-term status.

Tail Provisions

Individuals who cease UK residence remain within IHT scope for a period determined by their prior residence history. Those resident for 10-13 years retain IHT exposure for 3 years post-departure; those resident for 14-19 years for 4-9 years post-departure; and those resident for 20+ years for 10 years post-departure.18 The tail provisions prevent individuals from simply establishing residence elsewhere to escape IHT on accumulated wealth.

Business Protection Implications

Business owners with overseas corporate interests or non-UK business assets face expanded IHT exposure under the new regime. A long-term resident with shares in a non-UK company valued at GBP 5 million previously excluded such assets from UK IHT if claiming non-UK domicile. Under the residence-based system, these assets are fully within scope.

Business protection requirements therefore extend to overseas assets for long-term residents. Cross-border insurance solutions, trust structures compliant with multiple jurisdictions, and coordination with overseas advisors become necessary components of comprehensive protection planning.

For business owners contemplating departure from the UK, the tail provisions create continuing insurance requirements during the exposure period. Protection arrangements should account for the potential decade-long IHT tail following departure.

7. Practical Implementation Framework

Advisors integrating business protection with estate planning should implement structured review processes addressing the technical considerations outlined above.

Initial Assessment Phase

The initial assessment establishes current position and identifies gaps:

  • Establish current BPR-qualifying asset values and project growth to April 2026 and beyond
  • Identify existing protection arrangements and obtain legal documentation for solicitor review
  • Assess residence history for long-term resident status and tail provision applicability
  • Review current will provisions and any lifetime trust structures holding business assets

Protection Requirement Quantification

With the factual position established, advisors can quantify the protection need:

  • Calculate IHT exposure under reformed BPR regime using GBP 2.5 million allowance
  • Account for spousal allowance transfer where applicable
  • Assess AIM portfolio holdings separately, applying 50% relief regardless of allowance
  • Factor in residence-based regime exposure for worldwide assets

Agreement Structure Review

Legal documentation requires specialist review to ensure BPR preservation:

  • Engage specialist solicitors to review existing shareholder or partnership agreements
  • Ensure cross-option structure rather than buy-and-sell obligations
  • Verify consecutive option exercise periods are properly documented
  • Confirm valuation mechanisms reflect current business value

Policy Structure Optimisation

Insurance arrangements should align with legal and tax requirements:

  • Ensure personal ownership for shareholder and partnership protection
  • Verify all personally-owned policies are written in trust
  • Review key person insurance for BIM45525/45530 compliance
  • Assess relevant life policy eligibility for director benefits

Ongoing Monitoring Protocol

Business protection requires ongoing advisory engagement:

  • Schedule annual protection reviews aligned with business valuation updates
  • Monitor legislative developments and HMRC guidance
  • Reassess residence status annually for internationally mobile clients

8. Conclusion

The April 2026 Business Property Relief reforms create material IHT liabilities for business owners with qualifying assets exceeding GBP 2.5 million, fundamentally changing the economics of business protection advice. Advisors who understand the interaction between protection product structures, agreement documentation, and BPR eligibility can deliver tax-efficient outcomes that preserve available reliefs while ensuring adequate liquidity.

The binding contract trap under IHTA84 Section 113 represents the most consequential technical risk: an improperly structured buy-and-sell agreement destroys BPR entirely, potentially quadrupling IHT liability compared to a properly structured cross-option arrangement. Legal review of existing and proposed agreements by solicitors experienced in BPR-preserving structures is essential.

The residence-based IHT regime adds complexity for internationally mobile business owners, extending IHT exposure to worldwide assets for long-term UK residents and maintaining exposure through tail provisions for departing residents.

Business protection specialists are positioned to add significant value through coordinated advice that integrates insurance solutions with legal structuring and tax planning. The pre-April 2026 planning window provides opportunity for proactive engagement with business owner clients facing succession planning decisions.

CPD Declaration

Estimated Reading Time: 18 minutes Technical Level: Advanced Practice Areas: Business Protection, Estate Planning, Inheritance Tax, Succession Planning

Learning Objectives

Upon completing this article, practitioners will be able to:

  1. Distinguish between cross-option agreements and buy-and-sell agreements in terms of BPR eligibility under IHTA84 Section 113
  2. Apply the BIM45525 deductibility conditions when evaluating key person insurance recommendations for trading companies
  3. Evaluate the impact of the April 2026 GBP 2.5 million BPR allowance on business succession planning strategies
  4. Identify the conditions under which relevant life policy premiums qualify for favourable tax treatment under EIM15045

SRA Competency Mapping

  • Technical legal practice: Application of statutory provisions and HMRC guidance to commercial planning scenarios
  • Client care and professional conduct: Coordinating multi-disciplinary advice for complex client circumstances

Reflective Questions

  1. How would you adapt your business protection review process to address the April 2026 BPR threshold changes for clients with qualifying assets approaching or exceeding GBP 2.5 million?
  2. What additional documentation and professional collaboration would you require before recommending shareholder protection arrangements to ensure BPR is not inadvertently defeated?
  3. How might the residence-based IHT regime affect your advice to internationally mobile business owner clients, and what additional information would you need to gather during fact-finding?

Professional Disclaimer

The information presented reflects the regulatory and legislative position as of 2026-02-06. Regulations, tax rules, and professional guidance are subject to change. Readers should independently verify all information before acting and seek advice from appropriately qualified solicitors, financial advisors, or other professionals for their specific circumstances.

Neither WUHLD nor the author accepts liability for any actions taken or decisions made based on the content of this article. Professional readers are reminded of their own regulatory obligations and duty of care to their clients.

Footnotes

Footnotes

  1. GOV.UK, Summary of Reforms to Agricultural Property Relief and Business Property Relief (December 2025). https://www.gov.uk/government/publications/agricultural-property-relief-and-business-property-relief-reforms/summary-of-reforms-to-agricultural-property-relief-and-business-property-relief ↩

  2. Association of British Insurers, Record GBP 8bn Paid Out in Vital Protection Claims During 2024 (July 2025). https://www.abi.org.uk/news/news-articles/2025/7/record-8bn-paid-out-in-vital-protection-claims-during-2024/ ↩

  3. FCA, Market Study MS24/1: Market Distribution of Pure Protection (January 2026). https://www.fca.org.uk/publications/market-studies/ms24-1-1-market-distribution-pure-protection ↩

  4. Finance Act 2025, Part 3 - Inheritance Tax (March 2025). https://www.legislation.gov.uk/ukpga/2025/8/part/3/crossheading/inheritance-tax ↩

  5. HMRC, BIM45525 - Specific Deductions: Insurance: Key Man Insurance (November 2023). https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim45525 ↩

  6. HMRC, BIM45530 - Specific Deductions: Insurance: Key Man Insurance: Non-trade Purposes (November 2023). https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim45530 ↩

  7. HMRC, EIM15045 - Employment Income: Employer-Financed Retirement Benefits: Relevant Life Policies (February 2024). https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim15045 ↩

  8. Inheritance Tax Act 1984, Section 113. https://www.legislation.gov.uk/ukpga/1984/51/section/113 ↩

  9. HMRC, IHTM25292 - Business Relief: What Reliefs Are Available and When: Contracts for Sale: Shareholdings and Partnership Interests (August 2024). https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm25292 ↩

  10. HMRC, SVM111120 - Shares Valuation Manual: Property Subject to Contract for Sale: Options (March 2025). https://www.gov.uk/hmrc-internal-manuals/shares-and-assets-valuation-manual/svm111120 ↩

  11. GOV.UK, Summary of Reforms to Agricultural Property Relief and Business Property Relief (December 2025). https://www.gov.uk/government/publications/agricultural-property-relief-and-business-property-relief-reforms/summary-of-reforms-to-agricultural-property-relief-and-business-property-relief ↩

  12. GOV.UK, Summary of Reforms to Agricultural Property Relief and Business Property Relief (December 2025). https://www.gov.uk/government/publications/agricultural-property-relief-and-business-property-relief-reforms/summary-of-reforms-to-agricultural-property-relief-and-business-property-relief ↩

  13. GOV.UK, Summary of Reforms to Agricultural Property Relief and Business Property Relief (December 2025). https://www.gov.uk/government/publications/agricultural-property-relief-and-business-property-relief-reforms/summary-of-reforms-to-agricultural-property-relief-and-business-property-relief ↩

  14. House of Commons Library, Briefing Paper CBP-10181: Inheritance Tax Changes (January 2025). https://commonslibrary.parliament.uk/research-briefings/cbp-10181/ ↩

  15. Supreme Court of the United States, Connelly v United States, 602 U.S. ___ (2024). ↩

  16. HMRC, IHTM20012 - Life Policies: General Principles (January 2025). https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm20012 ↩

  17. Finance Act 2025, Part 3 - Inheritance Tax (March 2025). https://www.legislation.gov.uk/ukpga/2025/8/part/3/crossheading/inheritance-tax ↩

  18. HaysMac, Major Changes to UK Inheritance Tax: The Move to a Residence-Based Regime from April 2025 (April 2025). https://haysmac.com/insights/major-changes-to-uk-inheritance-tax-the-move-to-a-residence-based-regime-from-april-2025/ ↩

Preview Free