In the Budget on 30 October 2024, Rachel Reeves announced changes to the Inheritance Tax (IHT) regime. The changes are likely to affect many family businesses as they pass the business to the next generation.
Keeping the business in the family is fairly well encouraged under the current tax regime. If a person dies, and leaves the business to their spouse or children, then there is no tax liability. However, under the proposed changes, this sort of succession planning will incur a 20% IHT charge on assets over £1 million.
In this article, we look at the changes, what it means for you if you own a family business, and what options are available to you to minimise any unintended consequences.
The Budget also announced changes to IHT which affect farms, but agricultural relief is outside the scope of this article. Here, we’re focusing on family businesses which aren’t farms.
The current state of affairs for IHT for family businesses
At the moment, most businesses benefit from ‘Business Relief’ (formerly known as Business Property Relief).
Business Relief allows for a business to be passed on free of any IHT when the business owner dies. It’s currently uncapped, so whether your business is worth £100,000 or £10 million, it won’t attract any IHT when you pass it on.
In fact, the purpose of Business Relief when it was introduced in 1976 was to make sure that family-owned business could survive as a trading entity after the death of the owner.
What are the new rules?
The new rules introduce a cap on Business Relief.
For any business with more than £1 million of assets, some IHT will be payable. The first £1 million is free from IHT. After that, IHT is incurred at a rate of 20%.
This is less than the usual rate of 40%, but clearly much greater than nil, as it used to be.
Business Relief for shares that are not listed on a recognised stock exchange will reduce to 50%. Again, that means that it is charged at 20% (half of the usual 40% IHT rate). The £1 million allowance does not apply to these shares.
At the moment, it appears that the £1 million allowance is not transferable between spouses.
How does it impact you if you own a family business?
Family businesses are now exposed to an IHT liability which was never at play before. Businesses that have been passed through generations may now have to pay a hefty bill when one of the family members involved in the business dies.
For example, if your family business is worth £10 million, and you die after 6 April 2026, £1 million of the business will be passed down without any IHT. The remaining £9 million will be taxed at 20% (presuming that the nil rate band of £325,000 has already been used). The IHT liability is £1.8 million, and this must be paid within six months of the death.
Somehow, the business has to foot the bill. In lots of cases, a business may take a special dividend from the company to pay the IHT. But this is far from a panacea. The dividend will incur a further 38% tax charge, so the tax paid ends up higher than the initial 20%.
When do the new rules come into force?
The new rules are due to come into force from 6 April 2026.
At the moment, it is not enshrined in statute. Until it is, there is always the possibility that proposals might change. But at this stage, the working assumption is that the new rules apply from April 2026.
What options do you have?
With the potential for large tax bills on the horizon, some family businesses are choosing to make the tough decision to sell the business now. We understand that this is an emotive decision, particularly if the business has been in the family for a long time.
But when you work out the sums, it may become clear that now is the best time to realise the gains of all your hard work over the years. If you’ve built the business up, then you may feel that it’s a better use of your money to enjoy the proceeds of the sale, than for a chunk of it to become IHT.
Your other options could be:
· Sell the business upon the death of the owner. The sale could help to cover the new tax liabilities.
· A part-sale, or break up the business.
· Carry on as normal and wait to see if the proposals become hard law in April 2026.
If you’re thinking about selling the business now, we can help you plan your first steps. There’s often a bit of work involved to get the business in the best shape for a sale, and it can take around six months to get all of your ducks in a row. We can help you prepare for the sale, find the right buyer, and complete the sale in good time.
To book a meeting, or to discuss your options, please contact Simon Norton at simon.norton@bristolbusinessbrokers.co.uk or on 0117 379 0117.