Gifting the family business – minority discounts

Kate Marshall, Associate

In April 2026, significant changes to Business Relief came into full effect. By way of a recap, historically, a trading business used to qualify for 100% relief from Inheritance Tax. Since April 2026, the first £2.5million (per individual) will pass completely free of Inheritance Tax. Anything over and above this amount will now only receive 50% relief, which effectively results in a 20% IHT rate over the £2.5million allowance.

Many family trading businesses will therefore still be caught by these provisions and consideration should be given as to whether any planning steps can be taken to mitigate the resultant IHT liability.

One such option is the possibility of gifting shares in the business – whether that be outright, or into trust for a class of beneficiaries. The primary advantage of gifting the shares is that if you survive for 7 years from making the gift, the value will fall outside your estate for Inheritance Tax purposes and therefore will not be subject to IHT on your death. If the value of your trading business breaches the £2.5million allowance, then it is certainly worth considering.

Any such gift should be properly documented, and professional advice should be sought to properly consider the practical and tax implications – particularly considering the availability of minority discounts on shareholdings.

What are minority discounts?

When deciding how many shares to give away, it is important to factor in the potential availability of a minority discount. HMRC may accept that a discount should apply where the shares being valued represent a minority holding. This is because a minority shareholding lacks voting control and cannot force decisions.

The level of discount will depend on the size of the shareholding, but for illustrative purposes the discounts could be as follows:

Diminution in value

Linked to the concept of minority discounts is the concept of diminution in value. For IHT purposes, HMRC consider that the value of the gifted shares is the difference between :

1. the value of the shares before the gift; and
2. the value of the retained shares after the gift. Importantly, the value of the retained shares takes into account any minority discount that can be applied.

Example

So, for example, Nick owns a business worth £20,000,000. If Nick carried out no IHT planning, the IHT on his death will be in the region of £3,500,000.

To try and mitigate this, Nick decides to give away 72% of his business to his children. Nick therefore retains a 28% shareholding. Broadly speaking, Nick’s resultant 28% shareholding would be worth £5,600,000. However, Nick’s remaining shareholding is a minority holding and a discount therefore applies. If we apply a discount, of say, 30%, the actual value of Nick’s 28% shareholding for IHT purposes becomes £3,920,000. The actual value of the gift is therefore £9,760,000.

If Nick survives for 7 years from making the gift, the IHT payable on his death would be

£3,920,000 – £2,500,000 = £1,420,000

IHT at 20% = £284,000

Whilst you must, of course, be comfortable with the value you are gifting away, there can be real IHT savings if you do have appetite for gifting – particularly if you can make use of minority discounts. If retaining control is a consideration, then thought should be given as to whether gifting into trusts would be suitable. To find out more, or to discuss your trading business further, please speak to our private client team.