Understanding the Changes to Inheritance Tax on a Family Business

The Autumn Budget saw huge changes to the inheritance tax reliefs available for business owners and those in the agricultural community. And whilst there’s been a lot of publicity of the impact on farmers, the impact for family businesses has been somewhat under the radar, possibly due to more immediate issues, such as the increase in employers NIC, being in focus.

Given that these changes could result in a significant increase to inheritance tax (IHT) liabilities, Simon Hurren explores how these changes might impact you and what strategies might be available to help.

What are IHT reliefs?

Business Property Relief (BPR) has long been a cornerstone of Inheritance Tax (IHT) planning for business owners. These reliefs have allowed qualifying share or business assets to be passed on free of IHT or at a reduced rate, depending on the nature of the asset.

Before the recent changes, BPR and APR provided unlimited 100% or 50% relief for qualifying assets, such as 100% relief on unquoted shares in trading companies. Given that the value of family businesses can be significant, this has previously enabled business owners to transfer substantial wealth without incurring a 40% IHT charge.

Changes to family business inheritance tax

The changes announced in the 2024 Autumn Budget though will see a £1 million cap on the value of assets eligible for 100% BPR and APR combined. Any value of qualifying assets above that threshold will be eligible for relief at 50%, which remains unlimited.

In addition, AIM-listed shares will see relief slashed, as they previously benefitted from 100% BPR, and will now only receive relief at 50%.

To show you the impact of these changes, let’s look at the difference the new rules will make for a family business owner, holding shares in their trading company worth £3 million, and with other personal assets that will use up their nil rate bands:

As you can see, this business owner’s estate will see its IHT exposure on the shares jump from nil to £400,000 overnight on 6 April 2026 – a huge liability to face that will inevitably have a significant impact on everyone affected. This will be acutely difficult for businesses that are not cash-rich and who hold most of their assets in areas such as property.

Many family business owners may be considering selling up to avoid this position, so that there is cash available to pay the IHT bill.

However, once a qualifying asset is sold, all BPR or APR will be lost. So, if the business owner above sold and instead had £3 million cash in their estate, the IHT exposure would increase to £1.2 million – an increase of £800,000.

Can family businesses be exempt from inheritance tax?

The upcoming changes will see many family businesses and farmers having to change the way they think when it comes to succession planning to mitigate these large liabilities.

Lifetime gifting can be a great planning tool, as – providing the person making the gift to another individual survives the gift by 7 years – the value of the gift falls out of their estate with no IHT due.  For example, a parent could gift their adult child shares in the family company, and if the parent survives 7 years, no matter how much those shares are worth, they don’t form part of their estate for IHT purposes.

Gifts to spouses are exempt for IHT. And whilst this means that the asset’s value passes to the spouse, this could be crucial to maximising the BPR or APR available, as each person has their own £1 million cap on 100% relief.

With outright gifts, there are wider considerations regarding asset protection and loss of control.

Trusts can be a tax efficient solution for succession planning, and can have other benefits too – for example, the donor can still retain control of the assets and safeguard the asset against several unwanted risks. Flexibility is also available with trusts, and they can be tailored to meet specific business or family needs.

What action can you take?

What’s crucial to all decisions is careful advice. There are lots of conditions that must be met for IHT relief to apply, and there may be other tax consequences for lifetime gifts including capital gains tax on non-spousal gifts, and potential IHT if the gift isn’t survived by 7 years.

And if you’re thinking about selling all or part of a business, care should be taken to consider the impact of the lost BPR or APR.

The good news though is that there are still plenty of planning opportunities for those thinking of selling up to maximise the wealth available to pass on to the next generation.

We’re here to support with bespoke advice

These inheritance tax changes have introduced new challenges for family businesses and farmers alike. But careful planning put in place now can help to secure the succession of your business to the next generation.

To learn more, and receive tailored advice about the ways you can mitigate your estate’s IHT liability, get in touch with Simon or one of the team by calling 0330 058 6559 or email hello@scruttonbland.co.uk