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Inheritance Tax changes on family businesses
The October 2024 Budget has attracted significant attention due to changes in Inheritance Tax (IHT) reliefs for those in the farming sector. However, the impact of Inheritance Tax changes on family businesses more generally has not been as widely considered. One reason for this is the more immediate concern over the rise in employers’ NICs.
Business Property Relief
Business Property Relief (BPR) has long been a crucial part of Inheritance Tax (IHT) planning for business owners. BPR has enabled the transfer of qualifying business or share assets either free from IHT or at a reduced rate, depending on the nature of the asset.
Before the Budget changes, BPR and Agricultural Property Relief (APR) offered unlimited 100% or 50% relief for qualifying assets, such as 100% relief on unquoted shares in a trading company. This has allowed business owners to transfer substantial wealth without facing a 40% charge to IHT.
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Inheritance Tax changes on family businesses: Business Property Relief
The new rules establish a £1 million limit on the value of assets eligible for 100% BPR and APR combined. Any qualifying assets exceeding this limit are eligible for relief at 50%, which remains unlimited.
Furthermore, relief on AIM-listed shares has decreased significantly from 100% to 50%.
By way of example, let us consider how the new rules affect a family business owner holding shares in a trading company worth £4 million, and with other personal assets that will use up their nil rate bands.
| Before the changes | From 6 April 2026 | |
| Value of shares | £4,000,000 | £4,000,000 |
| BPR at 100% | (£4,000,000)
Nil |
(£1,000,000)
£3,000,000 |
| BPR at 50% | Nil | (£1,500,000) |
| Chargeable to IHT | Nil | £1,500,000 |
| IHT at 40% | Nil | £600,000 |
It is clear that the estate’s IHT exposure on the shares increases from nil to £600,000 overnight on 6 April 2026. Such changes are likely to have a significant impact on all those affected. The greatest effect will be experienced by family businesses that are not cash-rich, perhaps holding most of their assets in property.
Indeed, family business owners may consider selling to avoid this position, making cash available to pay the IHT bill. However, on selling the qualifying asset, BPR or APR reliefs are lost. So, using the example above, if the business owner had instead held £4 million cash in their estate, the IHT exposure would rise to £1.6 million – an increase of £1 million!
Tax planning in light of the new rules
These changes will require many family businesses and farmers to reconsider their approach to succession planning in order to mitigate these substantial liabilities.
Lifetime gifting can be an effective planning tool. As long as the person making the gift survives for a further seven years, the value of the gift falls out of their estate. So, a parent might gift an adult child shares in the family business. If the parent survives for at least seven years, those shares will not form part of their estate for IHT purposes, whatever their value.
Spousal gifts are exempt from IHT, which can be crucial for maximising the BPR or APR available, as each individual has their own £1 million threshold for 100% relief. However, outright gifts may raise concerns regarding loss of control over assets and asset protection.
Trusts can be a tax-efficient solution for succession planning and offer additional benefits, such as allowing the donor to retain control of the assets and protect them against unwanted risks. They also provide flexibility and can be customised to suit specific business or family requirements.
Inheritance Tax changes on family businesses: What should you do now?
Careful inheritance tax planning is essential. Many conditions must be met for IHT reliefs to apply, and errors can prove very costly. Lifetime gifts can raise other tax consequences, including:
- a potential IHT liability if a donor does not survive their gift by seven years; and
- Capital Gains Tax on non-spousal gifts.
And care must be taken before selling all or part of a business in terms of the potential impact of losing BPR or APR.