Inheritance Tax Changes for Family-Owned Businesses

Since the Autumn Budget, much has already been written about the changes to Inheritance Tax Reliefs, namely Agricultural Property Relief and Business Property Relief that will apply from April 2026.

Whilst there has already been a strong focus on the impact to family farms, momentum is now gathering as the wider business community begin to understand the impact of the changes and how they will affect Family-Owned Businesses.

In summary the changes will mean that after 5 April 2026, where an individual has assets that qualify for Business Property Relief, the rate of relief will only be 100% on the first £1m of assets that do not pass to a surviving spouse.

Thereafter, for any assets over £1 million the rate of relief will reduce to 50%.  The effect of this means that on assets that qualify for the 50% Relief (i.e. assets in excess of £1 million) the effective rate of Inheritance Tax will be 20%.

This will therefore affect any individuals who are business owners with a business value of more than £1 million, including those who own shares in unlisted trading companies or who trade as a sole trader or partnership and have qualifying assets (e.g. shops, factories, warehouses, offices, yards) that are worth more than £1 million.

What could this mean for your Family-Owned Business?

The key message is that these changes will not apply until after 5 April 2026 so the existing 100% relief applies until then and therefore there’s time to plan.

A simple example shows the effect of these changes.  A business that is worth say £12 million and currently passes intact to the next generation to continue to manage without any Inheritance Tax liability arising, could now face a liability of £2 million on the second death (£12 million – £1 million x 2 x 20%).

The question you and many other families now have is how that £2m would be funded, whilst limiting the impact on the business’s employees, suppliers, customers and the ongoing taxes generated for the benefit of the treasury, there is simply not that level of capital available.

Despite this, careful thought and analysis is needed before you make any changes to the ownership of assets in response to these changes.

There is a risk that without fully considering the tax consequences of a gift of assets, an unexpected Capital Gains Tax liability could be created, or the gift may be ineffective for Inheritance Tax purposes and therefore still remain in the Inheritance Tax net.

What steps can you take to mitigate the impact of these Inheritance Tax changes for business owners?

The first aspect to be considered is how assets are currently held.  It is important to note that HMRC have indicated that the £1 million allowance is not transferrable between spouses, so planning is now needed to ensure that sufficient assets pass on first death to claim this allowance for both spouses.  This is likely to require a change to Wills.

Gifts of assets is an obvious answer but as noted above care is needed to ensure that a Capital Gains Tax liability is not created, or that the gift may be ineffective for Inheritance Tax purposes.  And then, looking at a business as a whole, where selected assets only are gifted, it’s important to check that the Inheritance Tax position is improved and not worsened, due to the loss of Reliefs on other assets.

Where gifts are effective for Inheritance Tax (known as a Potentially Exempt Transfer), but the donor does not outlive those gifts by seven years, there is an element of Taper Relief which reduces the effective rate of tax on assets that qualify for 50% Relief to 16% after 3 years, reducing by 4% every year until it is fully exempt after 7 years.  HMRC have confirmed that Taper Relief will continue to apply where the new 50% rate of Business Property Relief applies.

Insurance could be another effective solution particularly where there is the ability for the business to fund this tax efficiently.  Insurance can be arranged in respect of assets remaining in the Estate or the tax arising on a failed Potentially Exempt Transfer.  The big advantage of insurance is that it allows time to effectively plan.

What action should you take now?

For many families who have not needed to consider Inheritance Tax on the Family-Owned Business since the mid-1990s these changes will likely come as a shock and cause you immense concern.  There are a generation of family business owners who have structured their affairs to manage the value created by their life’s work that will now need to act to ensure that robust plans are in place to mitigate the impact of these changes.

A fall-back position is in relation to the payment of this Inheritance Tax should it crystalise.  Due to the illiquid nature of shares or assets used in a family business it has always been possible for the Executors of the Estate to elect to pay this Inheritance Tax over a ten-year period.  A recent welcome announcement by HMRC is that they have reminded taxpayers that interest will not be charged should such an election be made – but this will of course need to be claimed. Nevertheless, there may be other considerations which make such an election impractical such as lending or banking covenants.

The above is all based on press releases issued by HMRC on the date of the Autumn Budget and the days following. Therefore, the impact of the legislation may not yet be fully understood and could change in the period leading up to its release and a possible future inclusion in a Finance Bill.

But as a family-owned business you now need to assess what your current Inheritance Tax position is and how that might change after April 2026.

By ensuring you’re fully aware of the impact of these changes you can then start to prepare a plan and take the appropriate steps to protect your business and ensure that this passes intact to the next generation.

For further advice and to discuss your personal circumstances with Graham or a member of our Tax team, get in touch by emailing hello@scruttonbland.co.uk or calling 0330 058 6559.