28 November 2024

Introduction

Family businesses often take a long-term view on life and business, sharing a vision across generations. Being custodians of a successful family business requires commercial acumen, as well as clear succession and governance plans, for the business and the family.

For at least a generation, many family business owners have formed their shared vision on the assumption that shares in a trading business would qualify in full for inheritance tax (“IHT”) relief (if the conditions were met).

The proposed reforms to agricultural property relief (“APR”) and business property relief (“BPR”) will, if implemented, change the tax landscape considerably, and family business owners will need to review their tax, succession and commercial plans in detail ahead of the proposed changes.

We set out below the practical considerations for individuals, families and trustees who stand to be affected from April 2026 onwards.

Proposed reform

There is continued speculation about the impact of proposed tax reforms to APR and BPR, due to take effect from 6 April 2026.

Whilst the changes have been described as “potentially seismic”1, it remains to be seen whether the Government will refine its proposals in response to concerns from affected stakeholders in the farming and wider business community.

APR and BPR in their current form reduce the value of relevant business or agricultural property when calculating the IHT due, either on death or on transfers into trust, at a rate of 100% or 50%. There is no limit on the amount of value which can be reduced under the current rules.

Under the Government’s proposals, from 6 April 2026 onwards, in addition to existing allowances and exemptions, the 100% rate of relief of APR and BPR will continue only for the first £1 million of combined agricultural and business property held by an individual, and it will be 50% thereafter. In effect, the value of such assets above £1m will be subject to IHT at 20%.

Assets automatically receiving the 50% rate of relief will not use up the £1m allowance and any unused allowance will not be transferable between spouses and civil partners on death.

The Government proposes that trusts which hold qualifying business property and/or agricultural property which were created before 30 October 2024 will have a £1 million allowance for 100% relief (with trusts created on or after 30 October having a more restricted allowance). There will be a technical consultation in early 2025 on the detailed application of the policy to charges on property within trust.

Individuals, trustees and advisers should await the outcome of the consultation, and the legislative detail, before making any key decisions on ownership and structuring. However, families should start considering the impact of the new rules on their succession and governance plans, and the updates or changes which may be required, possibly after many years of a settled vision. This is particularly pressing for older clients who may want to press on with the gifts described below and start a seven-year clock running.

Immediate considerations: tax

The changes introduced by the Budget will be a major event in the lifecycle of affected businesses and their owners.

As a starting point, family business owners should review the existing capital structure to identify their potential IHT liability under the new rules. This applies to individuals, as well as trustees, holding shares in the business.

Depending on the value of the business and the age and number of shareholders, some family businesses may find considerable value will be sheltered from IHT under the new BPR allowance rules, particularly where shareholdings are diversely held and value in the business is fragmented.

Considerations for individual shareholders

Some family businesses may have substantial assets and concentrated shareholdings, possibly held by elderly individual shareholders who face significant IHT liabilities under the new rules.

Those shareholders should consider how to mitigate their potential IHT liability under the rules not affected by the Budget. For example, the seven-year rule for potentially exempt transfers remains in place, which essentially exempts from IHT gifts that are made between individuals more than seven years before death. However, gifts of this nature require careful planning, to ensure the shareholders retain sufficient income and capital to support their needs, and any such gifts do not fall within the gift of reservation of benefit provisions.

There appears to be no limit on outright gifts (or gifts into trust) which qualify for APR or BPR under current rules, if the transferor survives seven years or dies before 6 April 2026. (In a slightly morbid twist, if an individual dies before 6 April 2026 owning BPR qualifying assets, their estate stands to benefit from the current rules and 100% BPR relief could apply without limit).

If the transferor dies after 6 April 2026, the Government proposes that the new rules will apply (for outright transfers or gifts into trust made on or after 30 October 2024) so that IHT will likely be chargeable on the gifts made. The position here will need to be considered further.

A gift into trust may be particularly appealing to family business owners as trusts allow assets to be given away, but control and flexibility retained. There appears to be a window to gift to trust before April 2026 though, as after that time there will be an immediate IHT charge on the value of business assets (above the £1m allowance) going in.

Some shareholders may wish to take out life insurance policies, either for their retained shareholding or for gifts made before April 2026, to provide funds (if structured correctly) to meet IHT liabilities. From a costs perspective however, this option is likely to be viable only for younger shareholders.

Considerations for trustees

Trustees will need to consider their position on upcoming IHT periodic or exit charges under the proposed new rates. If APR and BPR apply in the reduced form of 50% (on values above £1m), the current rates will be halved, with a maximum ten-year charge of 3% (or effective annual charge of up to 0.3%).

Some trustee shareholders may consider this charge to be a manageable cost, however this will depend on the trust’s liquidity (which might rely entirely on the dividend policy of the business), and be balanced against the needs of the beneficiaries in terms of income and capital distributions (and other taxes and trust expenses).

If not affordable then trustees should consider winding trusts up before the new rules come in April 2026 and whilst it should be possible to do so without a charge to IHT.

Follow-up action: review of Wills and succession plans

Reviewing and updating Wills and succession plans will be essential to ensure they are appropriate under the new IHT rules.

For example, it appears the £1m allowance (if not used) will not be transferable to a surviving spouse or civil partners on death. Individuals may wish to revise their Wills to “bank” the allowance, for example by leaving those assets on discretionary trust rather than to their surviving spouse, to make sure they “use it” rather than “lose it” on death.

New Wills should also take account of any gifts (once implemented) between now and April 2026 , so that they accurately reflect the individual’s wishes for their retained assets.

Any such changes should dovetail with the family’s wider long-term vision. Many families discuss such matters as part of the family’s governance system, whether informally or through a formal council or charter, and communication between affected family members (and trustees) on how they propose to deal with the changes will be key to the continued success of the business (and the family).

Wider considerations: corporate governance and commercial viability

Changing the capital structure of a business should be considered carefully. Where share transfers are proposed, reviewing the company’s constitutional documents will be important to make sure that such transfers are permitted (and for example do not fall foul of any pre-emption rights). If there are multiple new family shareholders, some families may conclude a shareholders’ agreement is necessary to regulate dealings between co-owners. Asset protection is another key concern for many family businesses, and marital agreements (whether pre-nups or post-nups) should be considered for new family shareholders.

From a commercial perspective, the directors will need to understand the liquidity requirements of individual and trustee shareholders going forward (if funds are needed to meet IHT), and update or implement a dividend policy with that in mind. Many businesses will need to review the commercial viability of increasing dividends to meet such tax liabilities, against the backdrop of increased national insurance contributions and minimum wage requirements, which will further affect the profitability and operational side of the business.

How we can help

We have more than 100 years’ experience advising on family business matters, including tax and succession advice to individuals and trustee shareholders and the wider family, and corporate and commercial advice to the directors and the business itself.

We can advise on how the new APR and BPR rules might impact you, help the family and the business plan accordingly and assist in shaping the future vision and legacy of your family business.

1 Sir James Wates, in The Times on Monday 4 November 2024

Key contact

Guy Broadfield

Guy Broadfield Senior Associate

  • Private Wealth
  • Entrepreneurs
  • HNW and UHNW Individuals

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