Little-known way inheritance tax pension raid could put thousands of businesses at risk – ‘issue is flying under the radar’

Thousands of small and medium-sized businesses could face forced liquidation after pensions become subject to inheritance tax in two years' time, because of a common retirement plan for entrepreneurs.

Chancellor Rachel Reeves announced in her first Budget last year that unspent pension assets would be included in inheritance tax calculations from April 2027. The reform currently dictates that the pension scheme must itself settle its share of the IHT bill.

But a quirk in many business owners’ retirement planning is that they invested their commercial property – like a business plant or premises – in their pension, as an asset to generate rental income, usually from the business acting as a ‘tenant’.

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Under the incoming inheritance tax rules, however, on the death of the business owner the inheritance tax bill will have to be settled by the pension scheme, not from the overall estate. So the pension scheme will have to find some way to get cash from the assets in the pension.

This could force a sale of premises or plants, of the business itself or even its closure as a going concern, if the pensions rule change goes ahead as planned. At least 15,000 businesses are likely to be affected, according to analysis by wealth management firm Evelyn Partners.

Gary Smith, financial planning partner and retirement specialist at Evelyn Partners, said: “This could be a serious problem for thousands of small and medium-sized businesses, one that is currently flying under the radar, probably because it’s not widely understood.”

“Owners and directors who don’t take advice or make preparations could fall foul of the new IHT charge, with the end result in some cases that their businesses are liquidated and jobs lost,” he added.

With one in ten company directors in the UK – 620,000 – now working past the state retirement age of 67, according to research by Bowmore Financial Planning, the issue is likely to become a pressing one for many soon.

Bowmore’s research, based on Companies House filings, also shows there are 445,000 company directors over the age of 70, as well as 105,000 company directors working past the age 80.

Inheritance tax bill

Smith has one retired client who owns a commercial property in their pension worth £1.2 million, on which the business tenant pays £100,000 rent a year into the pension for the use of that property.

The client and their spouse use that annual sum to drawdown and live off.

If the chancellor’s inheritance tax proposals are adopted as proposed then after April 2027, on the death of that individual the pension scheme could owe as much as £480,000 in inheritance tax – but all the pension scheme owns is a property worth £1.2 million.

Smith said: “So what happens then? Will the pension scheme be able to borrow money to pay the tax bill, or will the business have to borrow money to buy the property, at high interest rates, and put cash in the pension scheme instead?

“Will the estate be forced to sell the commercial property? Or does the retiree have to stop drawing down the £100,000 a year they planned to live off to build up liquidity to pay a future IHT bill instead and in so doing expand the IHT liability?”

Commercial property in company pensions

Business founders and owners have for years been advised to hold their firm's commercial property in their pension, all completely legal and within the rules.

It could either be put in a self-invested personal pension (SIPP) or a small self-administered scheme (SSAS), typical pensions for the self-employed.

In retirement, they could expect to live off the rental income from their tenant, often their own business, via their pension. They could then pass on assets held in that pension inheritance tax-free to their beneficiaries on death, along with the business itself.

But, said Smith, with the changes coming in from 2027, “on the death of the owner, the business could face the prospect of a disruptive fire sale of their premises to meet a tax bill that could even jeopardise the survival of the firm”.

Business owners could build up a cash reserve within their pension to pay the inheritance tax bill. But this would in itself increase a future tax liability.

Or they could persuade the business to buy back the property out of the pension. “Either of which could involve draining the business of funds and harm investment,” Smith said.

The pension scheme could potentially borrow money to fund the inheritance tax bill as a short term measure until the property can be sold.

The biggest problem, said Andy King, pensions technical specialist at Evelyn Partners, who had discussions with HMRC during the consultation process on the chancellor’s Budget IHT reforms, is “it seems awareness of the issue among the authorities is limited”.

“The danger is that it is dismissed as a minor headache affecting a few business owners, when in fact it could be something much wider and more damaging to family businesses, jobs and local communities,” King said.

Amending the rules so the pensions portion of inheritance tax bills – from April 2027 – could be settled by the overall estate, would help some, but not all.

“The problem would remain for those whose main or sole asset in the pension is a commercial property, as something will probably have to be borrowed or sold to meet the bill – and will that be the firm itself, its intellectual property or customer base?” King said.

Risks of making your business your pension plan

Selling the firm may not be so easy, however. Many directors are struggling to sell their businesses due to a drop in overall M&A activity in the UK, brought on by higher interest rates and slow economic growth, according to analysis by Bowmore Financial Planning.

This leaves owners with fewer opportunities to exit and to generate the money needed to fund their retirement or plan for their loved one's inheritance tax bill or both.

Charles Incledon, client director at Bowmore Financial Planning, said: “Centring your retirement strategy around selling your business can be a very high-risk approach. If it doesn’t pan out as expected, you can easily find yourself working into your seventies – or even beyond.”

Business owners are also facing higher capital gains tax from selling their firms. For additional rate taxpayers, this increased to 14% in April 2025 and will rise further to 18% in 2026.

Incledon added: “Tax rates may increase further before you decide – or are able – to sell your business. Business owners should plan for their personal retirement independently of their plans for their company.”