Inheritance Tax And Family Businesses

The recent Budget introduced a key change to Business Property Relief (a form of Inheritance Tax relief) which could adversely affect many family-owned businesses throughout the country. Whilst this change has been publicly debated in terms of how it could affect farming businesses, there has been less focus upon how it could also affect other types of family-owned trading businesses. This needs to change.

Business Property Relief offers different rates of relief depending upon the specific circumstances. However, at its most beneficial it can exempt the entire value of a person’s business interest from Inheritance Tax in the event of a person’s death. This has been a vitally important relief enshrined within our tax system to ensure that family businesses can pass down a business to the next generation without the cost of what could otherwise be a significant Inheritance Tax charge. This is particularly pertinent as many family-owned businesses do not have the liquidity within their business to pay such an Inheritance Tax charge.

The new changes mean that the highest form of Business Property Relief, 100% Business Property Relief is limited to being applied over up to £1 million of value. The value of an individual’s business interest over and above £1 million will now only benefit from Inheritance Tax exemption on 50% of the excess value resulting in an effective rate of tax of 20% on such excess value. These changes will take effect in relation to deaths which occur on or after 6 April 2026.

Whilst £1 million may still seem a generous threshold, there are many valuable family-owned shareholdings or business interests worth significantly more than this and individual family members may also have a number of different business interests which collectively are worth significantly more than £1 million. It is also apparent that the value of such businesses are not based upon liquid assets held by the business and may instead be based upon the business name and reputation, the contracts held by the business and plant and machinery integral to the business operation. It should also be highlighted that the payment of Inheritance Tax needs to be made by the deceased’s Personal Representatives. If funds do need to be accessed from the business itself to pay the Inheritance Tax, this could trigger a further tax charge on extraction of those funds.

Consideration will need to be given by business owners as to what steps they look to take to plan for these changes. One obvious solution could be to accelerate lifetime gifting of business interests to family members so that the value is fragmented between a number of family members rather than the value being loaded so much with one individual. This will ensure that more value can benefit from 100% Business Property Relief and may represent good business succession planning in any event as certain younger family members take more of an active management role within a business. However, any fragmentation of business interests can result in wider impacts such as risks to business cohesion and family conflicts affecting the direction of a business. Capital Gains Tax would also need to be considered in relation to the gift of business assets.

Establishing a family trust may also be a way of helping to address the tax concern ( the Trustees could include the owner of the original shareholding) and this approach may also help manage the concern as to business cohesion and loss of control.

There is also an existing mechanism which enables the personal representatives of an estate to elect to pay Inheritance Tax on business assets in ten equal annual instalments over 10 years which can help to manage liquidity problems. It does not seem as if the Government intends to restrict this right.

The exact nature of the new rules is not fully clear as the Government has not published any draft legislation relating to the proposed changes. It does seem however that the Government is intent on making the proposed changes and the only area which they are looking to make subject to a technical consultation is how the new Business Property Relief allowance should apply to lifetime transfers into trusts. This consultation is due to be released in early 2025.

It is apparent that family business groups have not been as vocal in opposition to Government plans as the farming community. However, this is likely to change once the impact of the changes starts to be felt by the business community.

About the author: Gavin Birchall is Head of Tax & Trusts at Birketts, a UK Top 50 law firm, with a dedicated, full service family business team. Gavin is a trusted tax advisor for a number of business owners, high net-worth individuals and their families. This role includes providing strategic tax advice as well as managing their tax affairs. Gavin can be contacted at gavin-birchall@birketts.co.uk.