Inheritance tax changes for family business owners — 3 strategies to reduce financial impact

The 2024 Autumn Statement included some significant changes to the way that interests in businesses will be taxed, both on death and on transfers of such assets into trust.

As a family business owner, it’s no longer possible to sit idly by — especially where it’s important to secure the financial security of the business and its viability in the hands of future owners.

Here, Steven Appleton — a private client lawyer who specialises in advising family business owners on estate planning and the creation of multi-generation succession strategies — outlines what you need to know about the changes and sets out three possible strategies to reduce their financial impact.

How is inheritance tax charged on family businesses?

Under the current rules — which remain in force until 5 April 2026 — most trading businesses will qualify for a special IHT relief called Business Relief, which reduces the rate of IHT from the standard 40% to 0%. So, if you die before that date, the next generation will inherit the family business without having to pay any IHT.

From 6 April 2026, these businesses will still qualify for Business Relief. However, instead of this being at 100%, only the first £1m of value will qualify for 100% relief (i.e., 0% IHT) and the balance would attract only 50% relief (i.e., 20% IHT).

What could this look like for me?

While we’d always recommend that you get a valuation, the difference in tax if you die on or before 5 April 2026 versus on or after 6 April 2026 is stark.

Let’s say that you own a business worth £10m and own all of its shares.

If you die on or before 5 April 2026, the IHT due on your death would be £0.

If you die on or after 6 April 2026, the IHT due on your death would be a whopping £1.8m.

Where would the money come from to pay the tax?

If you have liquid assets within your estate (i.e., those that sit outside of the business), these are the easiest resources with which to settle IHT. It’s also possible to pay any due IHT via up to ten equal annual instalments, free of interest (in the scenario above, this would equate to 10 x £180,000).

If you don’t have liquid assets in your estate to cover the tax, the only place this can come from is the business itself — and this is where things can get complicated. Unless the Government introduces a concession, the only way to get money out of the business to pay IHT — unless you liquidate the business — is to declare a dividend. 

To generate only one year’s IHT instalment of £180,000, the company would need to declare a dividend of £290,792 — taking account of the highest rate of tax on dividends — and the company would need to have generated pre-tax profits of £387,722 to facilitate this.

Three potential strategies to reduce impact of IHT changes

There are a few strategies to consider that may reduce the impact of IHT on business assets under the new rules.
 

1. Transfer shares to your spouse or civil partner

Transferring £1m of shares to your spouse or civil partner would fall within their £1m fully relieved allowance and save £200,000 in IHT overall.
 

2. Gift shares to the next generation

If you’re likely to live for at least another seven years, you might consider gifting shares to the next generation now. If you do so and live for seven years, there’d be no IHT due on the shares.

As a bonus, HMRC accepts that a minority shareholding isn’t worth a straight percentage of the whole company. For example, if you own 100% of the shares of your company that’s worth £10m, your shares are worth £10m. However, if you own 50% (between you and your spouse), HMRC accepts that these would be discounted by say 20 to 25% to reflect the fact that you can’t pass an ordinary resolution. If you make a gift of 50% of your shares to the next generation and survive for seven years, what you have left isn’t £5m of shares (i.e., half the value of the whole) but probably closer to £4m. In the scenario described above, if the business owner transferred £1m of shares to their spouse and 50% to their children (and survived for seven years), the IHT would reduce from £1.8m to nearer £400,000. The smaller your retained shareholding, the bigger the discount (e.g., a holding of 24% could attract a discount of 55%).

While all of this may sound simple, there are complexities around how the value of the shares that you’re giving away are valued — and this is something that we could help you to navigate. 

You should also think about the personal circumstances of the recipients of the shares. For example, what if they receive shares but then get divorced? We can help you to formulate a plan to manage and mitigate any risk.
 

3. Life insurance

For some — and especially if you’re a bit younger — you might consider life insurance to settle IHT on the business. There are various ways in which this can be set up, so you’d be best taking specialist advice.

Next steps

The award-winning specialists in our Brabners Personal team are able to tailor advice to your particular circumstances and challenges. With good quality advice, we may be able to help you navigate the IHT changes to ensure the security of your family business for this generation and beyond.

We’d also recommend that we review your Wills to ensure that you’re making the most efficient use of all exemptions and allowances, and that the business will end up in the right hands.

To find out more, get in touch with our personal legal experts today by emailing us at personal@brabners.com, calling us on 0333 004 4488 or completing our contact form below.

You can also get in touch with me directly.