How Investing In Startups Can Lower Your Inheritance Tax Bill

This article is for informational purposes only and does not constitute financial, tax, legal or investment advice. Always speak to a professional before making any investment or inheritance planning decisions.

 

Inheritance Tax (IHT) is starting to become a genuine concern for people across the UK. This is because the government has continuously changed the goal posts around how much of an estate can be inherited tax-free.

Most recently, in April 2025, the government changed the IHT system from a domicile-based approach to a residency-based one, essentially taxing anyone that resides in the UK.

Under the current government, a 40% tax is charged on parts of a person’s estate valued over £325,000. ‘Gifts’ given during a person’s lifetime are often exempt from this, as long as they are made seven or more years before a person dies.

And whilst many people leave gifts or trusts to their family to reduce IHT, there’s another lesser-known option: investing in early stage startups through SEIS and EIS.

These schemes don’t just offer tax breaks once invested, they might also allow investors to qualify from 100% IHT relief through Business Relief (BR) – as long as the investment abides by specific conditions.

Here’s how it works.

 

What Is Inheritance Tax?

 

Inheritance tax is a tax paid on assets being ‘inherited’ by a person’s family after they die. Crucially, this does not apply to spouses, but does apply to children and grandchildren.

In its most basic form, inheritance tax is charged at 40% on estates worth more than £325,000.

If a high-net-worth individual has a large estate, their children or beneficiaries could end up with a big tax bill, lowering the amount of wealth passed down.

 

What Is Business Relief (BR)?

 

Business Relief is a programme that allows some business assets – namely shares in unlisted companies – to be passed on free from inheritance tax.

However, in order to qualify for 100% tax relief on BR, the person must:

• Hold the shares for at least 2 years
• Not sell the shares before they die
• The company must be actively trading
• The company must be unlisted

 

 

Investing In Startups Through EIS/SEIS

 

The UK government has created SEIS (Seed Enterprise Investment Scheme) and EIS (Enterprise Investment Scheme) to encourage people to invest in high-risk startups.

The schemes are designed to make startups more appealing to investors by lowering the risk they take on. They do this by providing:

• Income tax relief
• No capital gains tax after 3 years
• Tax relief on losses, which mean investors still get cash out, even if the company fails
• And importantly – inheritance tax relief after 2 years – thanks to business relief

What this means in practice is that if you invest in an EIS or SEIS qualifying company and hold the shares for 2 years, your investment may be exempt from inheritance tax when you die.

Here’s how it works:

Let’s say you invest £200,000 into an S/EIS-eligible startup.

• You hold the shares for at least 2 years
• You pass away, and the shares are now worth £400,000
• That £400,000 would be excluded from your estate when working out inheritance tax
• Your heirs save £160,000 in inheritance tax (40% of £400,000)

However, in order for the shares for be eligible, you must not sell the shares before you pass away. It’s also worth checking whether the company you are investing in qualifies for BR. Most SEIS/EIS companies do, but it’s always worth checking!

 

When Do The 2 Years Start?

 

One important thing to be aware of is that the 2 year clock starts when you actually buy the shares, not when you send the money to a fund manager or platform.

Because of this, it’s important to start counting from when the shares are issued, which can be a few weeks after you send the money to be invested.

 

An Important Disclaimer

 

Whilst investing in SEIS/EIS companies can provide some very generous inheritance tax reliefs, they are still high-risk investments.

According to data from Startup Genome, the failure rate for startups in the UK is around 60%, so even if you do leave these shares in your estate, they might not be worth anything at all.

Additionally, if the startup stops trading or is bought by another company you could lose the relief, so it’s always worth weighing up the benefits and risks.

 

Inheritance Tax Relief In Exchange For Investment

 

Inheritance tax is likely to stay front and centre of the news agenda in the UK, and people will be looking at ways to use all the tax relief schemes available to them.

Through schemes like SEIS, EIS and Business Relief, the UK government is offering a 100% inheritance tax incentive, just for backing the country’s early-stage startups.

Of course, startup investing isn’t for everyone. It tends to be high-risk and unpredictable, with a high rate of failure.

So, if you’re looking to lower your inheritance tax bill whilst simultaneously backing some exciting UK startups, then it’s time to get investing!