A little-known inheritance tax pension raid could endanger thousands of businesses; the problem is going unnoticed

15,000 businesses whose owners have included their properties in their pension could be destroyed by changes to inheritance tax laws, experts have warned

Because of a common retirement plan for entrepreneurs, thousands of small and medium-sized businesses may be forced to liquidate if pensions are subject to inheritance tax in two years.

In her first Budget last year, Chancellor Rachel Reeves declared that, starting in April 2027, unspent pension assets would be taken into account when calculating inheritance taxes. As of right now, the reform requires the pension plan to pay its portion of the IHT bill on its own.

One peculiarity in the retirement planning of many business owners, however, is that they have included their commercial property, such as a business plant or premises, in their pension as an asset to produce rental income, typically from the business serving as a tenant.

However, under the incoming inheritance tax regulations, the pension plan, not the entire estate, will be responsible for paying the inheritance tax bill upon the business owner's passing. Thus, the pension plan will need to figure out how to extract money from the pension's assets.

If the planned change to the pensions rule is implemented, this could result in the sale of the company's assets, including its buildings and plants, or even its closure as a going concern. According to an analysis by wealth management company Evelyn Partners, at least 15,000 businesses are probably going to be impacted.

"For thousands of small and medium-sized businesses, this could be a serious problem that is currently flying under the radar, probably because it is not widely understood," stated Gary Smith, financial planning partner and retirement specialist at Evelyn Partners.

He continued by saying, "Owners and directors who do not heed advice or prepare may be subject to the new IHT charge, which in certain situations may lead to the liquidation of their companies and the loss of jobs."

According to research by Bowmore Financial Planning, one in ten company directors in the UK (620,000) are currently employed past the state retirement age of 67. This means that many will soon face a pressing issue.

According to Bowmore's analysis, which was based on Companies House filings, there are 105,000 company directors who are over 80 and 445,000 who are over 70.

Bill for inheritance taxes.

One of Smith's retired clients has a commercial property valued at 1.2 million dollars in their pension. The business tenant pays £100,000 annually in rent to the pension for the use of the property.

The client and their spouse draw down and live off of that yearly amount.

When that person passes away in April 2027, the pension plan may owe up to 480,000 in inheritance tax if the chancellor's inheritance tax proposals are implemented as proposed. However, the only property the pension plan owns is worth 1.2 million dollars.

Smith remarked: "What follows? Will the business have to borrow money to purchase the property at exorbitant interest rates and transfer funds to the pension plan, or will the pension plan be able to borrow money to pay the tax bill?

"Will the retiree have to stop taking out the £100,000 annually they intended to live on in order to accumulate funds to pay a future IHT bill, thereby increasing the IHT liability, or will the estate be compelled to sell the commercial property".

Company pensions for commercial property.

Owners and founders of businesses have long been advised to keep their company's commercial assets in their pension, as long as this is entirely lawful and compliant.

It could be placed in one of the two common pension plans for independent contractors: the self-invested personal pension (SIPP) or the small self-administered scheme (SSAS).

When they retire, they can anticipate living off of their pension and the rental income from their tenant, who is frequently their own company. In addition to the business itself, they could then transfer assets held in that pension inheritance tax-free to their beneficiaries upon their passing.

"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 jeopardize the survival of the firm," Smith said, referring to the changes that will take effect in 2027.

Enterprise owners could accumulate funds in their pension to cover the inheritance tax liability. However, this alone would raise a future tax obligation.

Alternatively, they might convince the company to use the pension to repurchase the property. Smith stated, "Either of which could involve draining the business of funds and harm investment."

The pension plan might take out a short-term loan to pay the inheritance tax bill until the property is ready to be sold. During the consultation process on the chancellor's Budget IHT reforms, Andy King, a pensions technical specialist at Evelyn Partners, spoke with HMRC and stated that "it seems awareness of the issue among the authorities is limited" as the main issue.

"The risk is that it is written off as a small inconvenience impacting a select few entrepreneurs, but it may be something much more widespread and detrimental to local communities, jobs, and family businesses," King stated.

Some, but not all, would benefit from changing the regulations to allow the entire estate to pay the pensions portion of inheritance tax bills from April 2027.

According to King, "the issue would still exist for those whose primary or only asset in the pension is a commercial property, as something will likely need to be borrowed or sold to pay the bill, and will that be the firm itself, its intellectual property, or its customer base".

The dangers of using your company as a pension plan.

However, it might not be that simple to sell the company. Bowmore Financial Planning's analysis shows that a decline in M&A activity in the UK, caused by slower economic growth and higher interest rates, is making it difficult for many directors to sell their companies.

As a result, owners have fewer options for leaving and earning the funds required to pay for their retirement, prepare for the inheritance tax bill of a loved one, or both.

"Centering your retirement strategy around selling your business can be a very high-risk approach," stated Charles Incledon, client director at Bowmore Financial Planning. You may find yourself working into your seventies or even later if things don't work out as planned.

When business owners sell their companies, they must also pay more in capital gains tax. This went up to 14 percent in April 2025 for additional rate taxpayers, and it will go up to 18 percent in 2026.

"Tax rates may rise further before you decide or are able to sell your business," Incledon continued. Owners of businesses should make separate plans for their own retirement from those for their business.