IHT reforms & the rise of the Family Constitution — how family businesses can protect their legacy

Steven Appleton from our private client team has been working with family business owners for much of his career — and it’s fair to say that the last couple of years have been particularly challenging. 

Following the Government’s decision to subject family business owners to inheritance tax (IHT) on the death of an owner, many families are now looking at passing on shares before they otherwise would. This is raising questions about how relationships within family businesses are managed as the number of family shareholders grows. As a result, many are turning to tools such as a Family Constitution to help to support succession planning.

Here, Steven explains what the new IHT rules mean for family businesses and how a Family Constitution can guide the decisions that follow.

The new IHT rules & their effect

Under the rules introduced for deaths that occur after 6 April 2026, where an individual dies owning an interest in a business worth more than £2.5m, IHT will need to be paid at an effective rate of 20%. While it’s worth acknowledging that this tax can be paid across ten years and on an interest-free basis, the cost of funding it can still be significant — especially if it needs to be funded from company profits. For some businesses, meeting this liability fundamentally undermines their financial viability.

Unsurprisingly, many family business owners are now considering accelerating their succession plans and transferring shares to the next generation far earlier than intended. Some have already made transfers that were entirely tax-driven, leaving them feeling uneasy about the future.

The role of a Family Constitution

Despite the stress and anxiety that these changed have caused, they’ve also created an opportunity: a moment for families to build a stable foundation for succession of ownership. Crucially, this is happening at a time when all members of the family — including the incumbent custodians of the family business — can actively engage in that planning.

I’ve worked with a number of family businesses over the years on the development of Family Constitutions (also known as Family Charters). In this context, think of them as a mission statement and an agreed set of principles for the family to follow — guiding the decisions that they make around the business and how they as a family interact with it.

Strengthening the family, not just the business

The goal of the Family Constitution isn’t a legally binding document that governs every movement of family members. It should bring everyone together under a shared vision and equip the current, next and subsequent generations of the family with the tools that they need — not only to succeed in business but to remain connected as a family.

A well-crafted Family Constitution will create a stable foundation that can help to inform any future planning. If done properly and sustainably, it can give the current custodians the confidence that they’re leaving their legacy in safe hands.

How to build a Family Constitution that works

A Family Constitution will look different for every family. The key isn’t the document produced at the other end but the process you go through in its preparation. 

Some of the key points that you should discuss and agree upon include:

• What are your key values as a business/family?
• Do you want this to remain a family business and how will you work to achieve that?
• Who can or can’t own shares?
• What skills or experience do family members need before they join the business?
• What possible tensions could arise and how will you manage them?  Examples might include:
  • Agreeing rules around the employment of family members and their spouses.
  • Agreeing how the business is to be protected from third parties (for example, a requirement that family members must enter into pre- or post-nuptial agreements).
  • How family members benefit financially from the business, with distinctions for those who work in the business and those who don’t.
• How do we bring the next generation into our vision and equip them with our shared values?

Talk to us

Our award‑winning and nationally recognised inheritance tax and estate planning specialists can help you to protect your loved ones and put a clear, well‑crafted Family Constitution in place.

To discuss your situation, call 0333 004 4488, email privateclient@brabners.com or fill in our contract form.