Have you ever poured your heart into building a business, only to realize a tax rule could unravel it all? For thousands of small business owners across the UK, this isn’t just a hypothetical—it’s a looming reality. Starting in April 2027, a major shift in inheritance tax rules will include unspent pension assets in tax calculations, and it’s sending shockwaves through the small business community. For entrepreneurs who’ve tucked their commercial properties into their pensions—a savvy move for years—this change could mean forced sales, liquidations, or even closures. Let’s dive into why this matters and how you can protect what you’ve built.
The Hidden Threat to Small Businesses
Picture this: you’ve spent decades growing a family business, maybe a cozy café or a manufacturing plant. To secure your retirement, you followed expert advice and placed the business’s property into a self-invested personal pension (SIPP) or a small self-administered scheme (SSAS). It made sense—your business pays rent to your pension, you draw income in retirement, and the setup was tax-efficient. Best of all, you could pass it on to your heirs without the burden of inheritance tax. Sounds perfect, right? Not anymore.
Come 2027, the government’s new rules will change the game. Unspent pension assets, including commercial properties, will now face inheritance tax. Worse, the tax bill must be paid directly by the pension scheme itself—not the broader estate. This quirk could force business owners or their heirs to sell off critical assets, like the very premises their companies rely on, to cover the tax. It’s a scenario that’s catching many off guard, and the stakes are high.
This change could be a silent killer for small businesses. Many owners don’t even realize their retirement plans are now a tax time bomb.
– Financial planning expert
Why Business Owners Love Pension Property Investments
For years, holding commercial property in a pension has been a go-to strategy for business owners. It’s not hard to see why. The setup allows entrepreneurs to funnel rental income from their business into their pension, creating a steady stream of retirement income. Plus, it’s been a tax-efficient way to pass wealth to the next generation. By placing the property in a SIPP or SSAS, owners could sidestep inheritance tax entirely, ensuring their heirs inherited both the business and its assets intact.
Take Sarah, a fictional bakery owner in Manchester. She owns her shop’s building, worth £800,000, and holds it in her SIPP. Her bakery pays £60,000 a year in rent to her pension, which she uses to fund her retirement. Under the old rules, Sarah could rest easy knowing her children would inherit the property tax-free. But the new rules flip this on its head. If Sarah passes away after April 2027, her pension could face a tax bill of up to £320,000—money her pension doesn’t have in cash.
The Tax Trap: How It Works
Here’s where things get tricky. When a business owner dies, the new inheritance tax rules require the pension scheme to settle its share of the tax bill. But pensions like SIPPs or SSASs often hold illiquid assets—like commercial properties—rather than cash. To pay the tax, the pension scheme might need to sell the property, which could disrupt or even destroy the business that relies on it. For some, this could mean selling the business itself or shutting it down entirely.
Experts estimate that around 15,000 UK businesses could be affected. That’s not a small number—it’s thousands of local employers, family-run shops, and community hubs at risk. And with one in ten company directors now working past the state retirement age of 67, the issue is becoming urgent. Many of these older entrepreneurs are counting on their pension-held properties to fund their golden years and secure their legacy.
- Forced sales: Selling a property to cover the tax bill could leave a business without a home.
- Business closures: Some owners may have no choice but to liquidate entirely.
- Job losses: Closures or downsizing could ripple through local communities.
A Real-World Example
Let’s consider another hypothetical: John, a retired factory owner. His pension holds a commercial property worth £1.5 million, generating £120,000 in annual rent from his business. John and his wife live comfortably off this income. But if John passes away after 2027, his pension could face a tax bill of £600,000. The pension holds no cash—just the property. To pay the tax, John’s family might need to sell the factory premises, potentially forcing the business to relocate or close. It’s a gut-wrenching scenario for a family that’s spent years building a legacy.
What’s the alternative? John could try to build up cash reserves in the pension to cover the future tax bill, but that would mean cutting back on his retirement income now. Worse, adding cash to the pension could increase the eventual tax liability, creating a vicious cycle. Another option is for the business to buy the property from the pension, but that could drain the company’s funds and stifle growth. It’s a lose-lose situation for many.
The lack of liquidity in pension-held properties is a massive issue. Owners are stuck between a rock and a hard place.
– Wealth management specialist
Why This Issue Is Flying Under the Radar
Here’s the kicker: not enough people are talking about this. Financial advisors warn that even policymakers seem unaware of the full impact. During consultations on the new tax rules, discussions with tax authorities revealed a surprising lack of awareness about how these changes could affect small businesses. It’s being brushed off as a niche problem, but the reality is far more serious.
Many business owners are also in the dark. If you’re one of them, you might be thinking, “This doesn’t apply to me—I’ve got years left.” But with 445,000 company directors over 70 and 105,000 over 80, according to recent data, this issue could hit sooner than you think. And even if you’re younger, planning ahead is critical to avoid a financial disaster for your heirs.
What Can Business Owners Do?
So, what’s the plan? The good news is that you still have time to prepare before 2027. The bad news? There’s no one-size-fits-all solution, and acting now is crucial. Here are some steps to consider, based on expert advice and practical strategies.
- Consult a financial advisor: A professional can assess your pension setup and estimate your potential tax liability. They’ll help you explore options tailored to your business.
- Build liquidity: Start setting aside cash in your pension to cover a future tax bill, even if it means adjusting your retirement income.
- Explore restructuring: Consider transferring the property out of the pension to the business or another entity, though this comes with its own tax implications.
- Plan for succession: Work with your heirs to ensure the business can continue without relying on pension-held assets.
Each option has trade-offs. Building cash reserves might reduce your retirement income, while transferring assets could trigger other taxes. Succession planning takes time and coordination. That’s why starting early is non-negotiable.
The Bigger Picture: Economic Impacts
This isn’t just about individual businesses—it’s about the UK economy. Small and medium-sized enterprises (SMEs) employ millions and drive local communities. If thousands of these businesses face forced sales or closures, the ripple effects could be devastating. Jobs could be lost, communities disrupted, and economic growth stifled. And with merger and acquisition activity already sluggish due to high interest rates, selling a business to fund tax bills isn’t as easy as it once was.
Then there’s the added sting of rising capital gains tax. For business owners looking to sell, the tax rate for additional rate taxpayers jumped to 14% in April 2025 and will hit 18% in 2026. This makes exiting a business even costlier, further complicating retirement and succession plans.
| Challenge | Impact | Potential Solution |
| Inheritance Tax on Pensions | Forced sale of assets or business closure | Build cash reserves or restructure assets |
| Rising Capital Gains Tax | Higher costs when selling a business | Plan sales early or explore tax reliefs |
| Low M&A Activity | Fewer opportunities to sell businesses | Focus on internal succession planning |
A Call for Change
Some experts argue the rules need tweaking. One suggestion is to allow the broader estate, rather than just the pension scheme, to settle the inheritance tax bill. This could ease the pressure on pensions holding illiquid assets like properties. However, even this fix wouldn’t solve everything—many owners’ primary asset is the property itself, leaving them with few options to cover the tax without selling.
I’ve always believed that tax policies should support, not strangle, small businesses. The UK thrives on its entrepreneurs, and it’s disheartening to see a rule change threaten their legacies. Perhaps the most frustrating part is the lack of awareness—both among owners and policymakers. Raising the alarm now could push for fairer rules or at least give business owners time to adapt.
Final Thoughts: Act Now, Plan Smart
The clock is ticking. April 2027 might seem far off, but for something as complex as restructuring a pension or business, two years is barely enough time. If you’re a business owner with commercial property in your pension, don’t wait for the tax bill to land in your family’s lap. Start exploring your options today—whether it’s consulting an advisor, building cash reserves, or rethinking your succession plan.
In my experience, the best plans are the ones you make before you need them. This tax change is a wake-up call for business owners to take control of their financial future. Your business is more than just a paycheck—it’s a legacy. Protect it.
Planning ahead isn’t just smart—it’s survival for small businesses facing these tax changes.
– Retirement planning advisor
By taking action now, you can shield your business from the worst of these changes and ensure your hard work lives on for generations. Don’t let a tax rule rewrite your story.
