How inheritance tax changes could hit your family business

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published 16 December 2024

Most of the attention – and anger – since Rachel Reeves’ Budget announcement on inheritance tax (IHT) has focused on the impacts on farmers. But family business owners are facing identical changes to the IHT rules under the chancellor’s plans. It’s vital they start to plan accordingly.

The key change, due to come into effect from 6 April 2026, is to business property relief (BPR). Like agricultural property relief, its cousin in the farming sector, BPR currently takes the majority of businesses out of the IHT net; when you leave a business (or an interest in a business) to your heirs, or transfer it to them during your lifetime, there is no IHT to pay.

That will change in 16 months’ time; only businesses worth less than £1 million will qualify for full BPR. The value of a business above that limit will potentially be subject to IHT, albeit at the discounted rate of 20%.

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The worst-case scenario is that the new owners of the business, perhaps your children, are forced to sell it or break it up to pay the IHT due. However, with sensible – and perfectly legal – planning, there are plenty of ways to protect your family against such prospects.

Firstly, make it a priority to get an up-to-date valuation of your business from a professional adviser, and to check on its current structure and ownership. The answers will tell you where you currently stand.

If your business is worth £3 million, say, and you own it in its entirety, your death could create an IHT liability. If you own the business jointly with your spouse and two children, so that each shareholding is worth £750,000, passing it on may be less problematic.

Simple changes to your will can make a big difference. For example, passing shares directly to your children, rather than to your spouse, can reduce or eliminate the IHT due when your partner eventually dies.

In addition, it may make sense to transfer some ownership of the business to your children while you’re still alive. Gifts made during your lifetime will be free of IHT as long as you survive for seven years after making them under the potentially exempt transfer rules.

And while such gifts could in theory land you with a capital gains tax (CGT) bill – since you’re effectively disposing of part of the business – holdover relief is usually available on gifts to family members. CGT is only payable if and when the receiver sells the shares or the whole business.

Such arrangements can work well but check the legal position. For example, if you’re intending to retain control of the business after gifting an interest in it, you will need to check this is allowed under the company’s articles of association and its shareholders’ agreement.

It’s also possible that you won’t be able to wipe out a future IHT liability completely, but you can plan for this prospect. One possibility is a life insurance policy that funds payment of the tax bill on your death. It may also be possible to take funds out of the company through dividends or asset sales, though these will potentially incur tax charges in their own right.

Finally, remember that IHT bills on family businesses don’t have to be settled immediately. The tax authorities recognise that these assets are illiquid. They therefore allow families to pay the IHT due in ten annual instalments. This could help avert a crisis asset sale.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.