Death and Taxes S5:E4 – Family business owners: Navigating BPR reform and succession planning

The proposed reforms to BPR will, if implemented, change the tax landscape considerably and greatly restrict the tax relief available to business owners on the transfer of shares in lifetime and on death. In this podcast, we look at what this means for family businesses and the action owners should consider taking in advance of April 2026 and I’m delighted to be joined by my colleagues, Julie Book and Richard Handel.

Julie is a partner in the Corporate M&A team specialising in advising UK and international companies on corporate reorganisations and corporate governance. Julie is part of the Private Wealth group at Burges Salmon with a particular focus on family offices and family businesses. Richard is a partner in the Family law and Divorce team. He is a highly experienced advisor to high-net-worth individuals and families following a divorce or relationship breakdown. He often advises on marital agreements as a means of protecting wealth and regularly advises family business owners on asset protection issues.

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Well, Julie, Richard, welcome back to Death & Taxes and you come to us at a time of significant tax change for family businesses, which is clearly driving a lot of work for all three of us in our different ways. I suppose at the outset, it’s important to just outline for listeners just how significant these changes are to the inheritance tax regime, which is due to come in from next April 2026. Julie, I mean, it’s often the case that family business owners have a shared vision for their business, is this something that you see day-to-day?

Julie Book (02:11)

Yeah, definitely. Thank you, Guy. Yeah, it’s something they’re really thinking about. I suppose their starting point is often they’ve built up the business and they’re looking to pass it on to the next generation. So that’s probably now not looking quite so simple. So you’re probably getting a lot of enquiries now from family business owners, aren’t you, about what do they need to think about with the impending changes from next April?

Guy Broadfield (02:30)

Absolutely. I mean, think there’s been an assumption amongst business owners that from an inheritance tax perspective, that their shares in a trading business would qualify in full for BPR if the conditions were met, and that would be without any limit, which under the existing rules would mean if you do meet the conditions for the tax, then you  know how inheritance tax should be payable if you transfer shares to the next generation, whether that’s in lifetime or death. And that’s been important for family businesses to help them to plan the succession to the business and secure continuity of ownership across, in some cases, many generations.

So, yeah, these BPR changes will, if they come through as we expect, change that tax position considerably and ultimately restrict the tax relief available to business owners on transfers of those shares. Important to say at the outset, it’s obviously not just restricted to companies and shareholders and the same considerations will impact relevant family partnerships and partners. But I suppose for the purpose of this pod, we’re really looking at what these rules mean for business owners and what action they should consider taking ahead of next April, 6th April, 2026.

Julie Book (03:38)

I’m conscious guy that we talked about this back in October in series four, I think it was episode five when we’d had the Autumn Budget 2024 about what it meant for business owners and entrepreneurs. Obviously it’s moved on a bit since then. I think we’re finding for entrepreneurs that yes, this is a consideration for them, but they’re less motivated by tax. They’re not perhaps viewing their business as one that they were going to pass on to their children. So they were seeing entrepreneurs looking at this. I think we are finding it really is family business owners, isn’t it? Who are really needing to grasp this now.

Guy Broadfield (04:09)

Yeah, absolutely. I mean, for some entrepreneurs, you know, if they are coming up to an exit event and want to consider some estate planning, using trusts and possibly transferring shares into trust before April 2026, that’s something for them to explore. And in other cases where entrepreneurs may hold shares and have more complicated family dynamics, and want to make sure that possibly children from previous marriages can benefit from their shares if they were to die, how they can go about doing that under these new rules, acknowledging there is a £1 million allowance that’s going to be coming in. And they might have to use the spouse exemption, for example, if in some way, possibly the benefiting a second spouse, for example. But what we’re really talking about here is business owners.

Absolutely listeners should go back to last November 2024 and listen to that pod. Certainly, what’s changed in the interim is we’ve had draft legislation which hasn’t really changed much of what’s being proposed. There’s a bit more detail there that’s still to be confirmed but after some considerable lobbying from the farming community in particular and business owners there hasn’t really been any change to those proposals.

So our comments from season four still apply. But I think it would be helpful to get your view on the wider sort of holistic view of how these changes could impact family businesses and in particular, you know, you and I have talked many times about the idea of the three circle model for family businesses, which hopefully some listeners will have come across before, which is very relevant to family businesses and how advisors think of all of the different parts that go towards a family business. So Julie, do you want to explain what, at least you understand by the three circle model and we’ll go through each of the constituent parts with your help and with Richard’s help.

Julie Book (05:53)

Yeah, sure. So in terms of what the three components are, you really have the owners, then you have the family, and then you have the business. And what you’re trying to do is sort of make a Venn diagram of the three and how they all interlink in the middle, which sounds pretty simple, but it’s that classic of every family being different, and you need to bring in sort of commercial and personal factors in consideration to those, as well as frankly, the fact that everyone is a human in a family and have to sort of get on and live day-to-day with each other. So you’re trying to pull all those together when you’ve got different motivations, different personalities, obviously a changing landscape.

Guy Broadfield (06:30)

Richard, as a family lawyer, I suppose you’d agree with that often the family dynamics can impact a business. So important to consider the human aspects to this type of planning as well.

Richard Handel (06:41)

Yeah, absolutely. Certainly, you’ve got to take in the human element and the family dynamics. That’s going to be crucial in working out how everything interlinks.

Guy Broadfield (06:52)

Okay, great. Well, I think for the purposes of today’s podcast, we are going to look at the three circles and we will start firstly with the ownership. And that’s principally because these tax changes are relevant to owners. And so, you we’ve got a change in that circle of the model, which undoubtedly will impact both the family and the business as well.

So if we look at the ownership first off, clearly, we’re looking at different types of structures that are involved, who has shares, whether those are owned personally by individuals, whether those are held in trust, and indeed how the family benefits from the financial aspects of the business and in what form. Now, in truth, under these new rules, there are, you know, if there are a number of existing owners, whether they are individuals or trustees, it’s entirely possible that they, those owners will face significant inheritance tax liabilities under the new regime, of course, depending on the value of the underlying business. So certainly what we’re seeing from a tax and trust perspective is that family business owners really should start to review their position, tax position and succession plans now, to the extent they haven’t done already. And really that’s with two main aims in mind. One, is to work out what their inheritance tax liability might be under these new rules. And then secondly, what action they can take to mitigate that tax liability, which may be focusing on how to reduce the value of those shares in their estate for inheritance tax purposes. And we can come on to talk about gifts of shares, for example.

Julie Book (08:29)

You mentioned gifting of shares and that might seem the most obvious thing to do, but obviously that will come with a lot of consequences. Are there any other straightforward options that you’re seeing people adopt?

Guy Broadfield (08:39)

I don’t think there are straightforward options per se, but certainly clients can look at taking an insurance against these liabilities. Now, clearly that will depend on the profile of the shareholder, their age, their health. In some cases for shareholders, that might be a cost-effective solution to that type of exposure or potential liability. But in other cases, it won’t be an option, particularly if you’ve got elderly shareholders, maybe a patriarch type figure or a matriarch type figure of a family business who may or may not be in good health.

I’m sure those who work in the insurance industry would say smoking makes it very difficult. If you’re a smoker and your insurance premiums, it could be quite considerable, so that may or not be an option. But leaving aside insurance for now, as you mentioned, there is the chance to make gifts of shares to to the next generation, which is one way of reducing the value in your estate. Now that might be outright, but also there is an opportunity before April 2026 to make gifts of qualifying shares into trust under the current rules, which to the extent you can claim business property relief at full rate at 100%, that relief can apply without limit ahead of next April 2026. So there’s scope to transfer shares into trust without an immediate charge to inheritance tax for family business owners without limits until 5th April 2026. And then on or after 6th April 2026, you would be looking at an immediate inheritance tax charge of 20% on the value of shares transferred above a million pounds, which could be considerable. So there are a number of tax considerations to think about here. What’s the immediate position with regards to inheritance tax? Indeed, what’s the position with regards to capital gains tax? And also any planning that’s done now after the budget, after the 30th of October 2024, really relies on the individual transferor surviving seven years from the date of that gift.

So whilst there is scope to transfer shares into trust before next April without that immediate charge for inheritance tax. If the transferor did die within the seven years, then there could be some inheritance tax clawed back on that. So lots of tax considerations to consider alongside other things like updating your will to make sure that it’s fit for purpose under this new regime and talking about succession plans.

Julie Book (11:17)

You’ve talked about individual shareholders. Is it different if there are trustee shareholders?

Guy Broadfield (11:22)

Similar considerations for trustee shareholders and clearly they would form part of this ownership circle in the three circle model. So really, they need to consider their potential exposure from April 2026 onwards. That might be in the form of periodic charges to inheritance tax if they do own BPR shares that qualify 100% for BPR but are worth more than a million pounds. It also depends on exactly when the trust in question was created and what the particular allowance is. So you can expect more consideration of tax liabilities where previously there weren’t any.

And in some cases, some trustees may decide that they can’t possibly afford that tax liability or for reasons of simplicity and possibly reducing the level of compliance or the burden of reporting, they may wish to wind up those trusts if necessary, so a lot of considerations for that type of owner. There is a separate podcast coming out as part of season five about the considerations for trusts and trustees in respect of these tax changes. So listeners should look out for that. Ultimately, it all goes to the question of who holds the shares at the moment? How do you need to structure that most efficiently going forward? And how does that reflect the needs of all the different family members?

Julie Book (12:38)

And that probably brings us quite neatly on, doesn’t it to the second circle and the family, particularly if we’re talking about gifting shares down into that generation, where you’re probably then actually widening or potentially widening the pool of shareholders to a broader of section of the family and all the personal and emotional factors that come into that.

Guy Broadfield (12:57)

Yeah, absolutely. I think Richard, it’d be interesting to get your thoughts on this, but I think communication amongst the family for this type of tax event is key. Yes, it’s a tax consideration, but there’s a wider impact on the family and particularly how the family benefits from the business. And it might be the case that families decide to pass shares on in in the business to the next generation possibly earlier than they previously considered. And Richard, as a family lawyer, you would say there are certainly asset protection considerations when it comes to that type of gift, lifetime gift.

Richard Handel (13:36)

Yeah, that’s definitely something that families need to be thinking about. So as you say, if shares in the family business are being passed on perhaps earlier than they previously would have been, then families need to think about whether they’re putting in places perhaps pre-nuptial agreements or post-nuptial agreements depending on their particular situation. So you may have families passing on shares to much younger children who aren’t yet married, but hopefully or perhaps one day will be and they want to consider whether they’re looking at perhaps having a pre-nup before they get married to try and protect the wealth of the family and the family business itself. Or you might have family members who already married, who are already perhaps actively involved in the business or not necessarily involved in the business, but are shareholders and they might want to consider whether they enter into a post-nuptial agreement again to try and protect the shares in the family business from sort of being used or shared in the event of a divorce.

Guy Broadfield (14:35)

Ultimately, think what we’re talking about there is protecting the business from potential conflict issues. And really, it’s a continuity point for the business, really. But it speaks to the communication between the family members to make sure they understand the position. And in your experience, do family business owners, do they often get that right? Or is it an ongoing development point for them as they, as the family grows and the business hopefully grows.

Richard Handel (15:05)

It’s really an ongoing development point. What we often say is that if there can be effectively, if you like, a family constitution where everybody sort of understands that those who are going to have a shareholding in the business will have some sort of protection put in place, that is helpful. But that obviously can be quite a difficult conversation. The earlier that those discussions happen, the better it tends to be.

Guy Broadfield (15:26)

Julie, how do you see integration of family values into the business practice? I’m thinking particularly family members who work in the business and those who don’t work in the business. How do families resolve that?

Julie Book (15:39)

Yes, so shares can bring quite a lot of power with them depending on your shareholding. So what we often see is people will split the shares into different classes which will have different rights. For example, some will be voting, some will be non-voting, some will hold economic rights, some will hold no economic rights. So you often see that different weightings are given to people, for example those who working in the business, and actually understand the day-to-day running of the business might hold greater voting powers, but then economically all of the siblings, for example, those working and not working in the business might have the same economic rights that are all treated equally that way, but you’re leaving the decision making to the people who are actually day-to-day involved in the business.

Guy Broadfield (16:19)

And would you see, there’s always lots of talk about family councils, for example. I assume this seems like a pretty significant event in the lifecycle of any family business, but that surely would be an issue for the family councils to discuss amongst all family members, whether or not they’re shareholders or possibly beneficiaries of a trust, for example.

Julie Book (16:40)

Yeah, exactly. I think it is giving everyone the opportunity to have their voice make it heard. But similar to what Rich was saying, it’s an evolutionary process. It will evolve over time as you sort of feel your way through it and work out what is actually going to work for you as a family alongside actually running the business day-to-day.

Guy Broadfield (16:58)

I suppose that clarity of at least family governance is crucial. And hopefully if you have the right things in place, then the final structure or at least the revised structure and the new outcome is hopefully supported by all the family members, which has to be a good thing for the family and of course the business itself. And that leads us onto the third circle of the family business model, which is the business itself. Now, Julie, this is a more of an operational consideration, I mean, clearly changes in ownership and decision making at shareholder level can impact the operational side of the business. So what are you seeing family businesses tackle now if they’re considering this type of restructuring ahead of next April?

Julie Book (17:48)

Yeah, you’re right. So it does have a natural knock-on effect to the actual operation of the business, but from an external person’s perspective, they shouldn’t see that. So a lot of it will often depend on also having a strong management team alongside the family, particularly if you’ve had a family where it’s perhaps the patriarch or the matriarch running the business, but other family members aren’t involved, they will often have a very strong management team who are running the business day-to-day.

So you’ll want to make sure that you maintain that and that they are suitably incentivised to carry on with their day-to-day role. Because ultimately if you do come to exit the business, that is what whoever buys the business will be looking for. And then alongside that, it’s really looking at what state is your business in? Is it in a state that can be sold or passed on to the next generation well or are there bits of the business that you need to really focus on to improve it?

Guy Broadfield (18:43)

And presumably the directors of the business, whether or not they’re family members, would want to understand the impact of these rules in terms of future liquidity requirements of shareholders. In many cases, family businesses may not be in the habit of declaring regular dividends. Some will, of course, some won’t. But if in future there are new tax liabilities that are coming, down the line that need to be funded in some way, presumably the directors would like to know about that, just in case there’s a call on them to provide funds, whether that’s to the executives of a deceased shareholder or otherwise, and plan accordingly.

Julie Book (19:26)

Yeah, definitely. ⁓ Any well-advised business, they’ll always be looking at their cash flow and what commitments they have. So if they are expected to suddenly be making regular payments, dividends that previously or historically they haven’t done, they will need to factor that into their business planning. It might change the strategy for their growth, for example, going forward, if they need to be bit more conservative and maintain that cash to fund their requirements.

Guy Broadfield (19:50)

And in line with that, there is obviously commercial viability to all of this. One would hope that it doesn’t impact family businesses negatively, but then again, it might. And indeed, it might lead to discussions about whether the next generation wants to be involved in the family business. And so you might find some next generation future possible owners don’t want to be involved. And so therefore, considerations of selling the business might become more relevant. Is that something you’re expecting or indeed seeing at the moment? Family businesses exploring potential exits or other sales?

Julie Book (20:25)

Yeah, definitely. I think family businesses are always looking at what their options are, whether that is a sale to a trade bidder, private equity, or increasingly we’re seeing sales to employees. So actually selling to an employee ownership trust, similar to what’s happened with the sale of The Entertainer business earlier that week. So that seems to be an increasingly popular option for businesses where they’ve got a good pool of employees that they actually want to reward by passing on the business to them rather than selling to a third party, for example.

Guy Broadfield (20:53)

I suppose that would be another major event in the last cycle of the business if they did decide to sell, but that would be another reason to get in touch with professional advisors and think about what the options are. Probably off the back of thinking about these tax changes, if the conclusion is that the family doesn’t want to be involved anymore, which would of course be an unfortunate conclusion, but could be the pragmatic one. Presumably from a corporate M&A perspective, it’s good to get in touch early with advisors about potential exits.

Julie Book (21:26)

Yeah, definitely. I think it is taking that holistic view and looking at, we want to pass on the shares to our next generation now, but longer term, how does that play out, which brings in the of the corporate angle. And then also, Richard, probably back to you in terms of asset protection and looking at what your future could look like and how that impacts what you’re putting in place with family members now.

Richard Handel (21:46)

Yeah, absolutely. if there’s going to be a sale and then significant wealth passing to the current owners and then they’re passing that down, then that’s one of the things you want to be looking at. Again, as I always say, pre-nups and post-nups. just consider what protection you might want to put in place in case the worst happens.

Guy Broadfield (22:06)

Well, thanks, Richard and Julie for those thoughts. I mean, clearly, hopefully, the listeners will have understand there’s a lot of related factors here and there’s an interdependence between the business considerations, the family points and the ownership considerations. Now, clearly, it’s the ownership here that’s driving a lot of change, possibly in family businesses and the whole idea behind looking at it in this holistic way is that changes in that one aspect of the business will inevitably impact the others. I mean, I think we expect the changes to ownership or possible changes to ownership to, they could spill into the operational side of the business, it could impact performance and they could obviously have impacts on the family if they’re not handled in the right way. So, Julie, what are your thoughts, your top tips for how people can successfully navigate these complexities.

Julie Book (22:58)

Yeah, I think it is really having a open, frank conversation between the family members and looking at the wider picture, including your governance arrangements and how what you’re trying to do as a family interplays with how the business needs to operate and so that those two dovetail together through your governance.

Guy Broadfield (23:17)

Richard, presumably with your line of work you would advise families establishing clear communication channels between all relevant family members.

Richard Handel (23:29)

Yep, absolutely. Certainly clear communications can help a lot and developing policies for dealing with conflict resolution and being clear about what everybody’s roles and responsibilities are is really important. And I think that will help the families get through these times.

Guy Broadfield (23:46)

Yeah, and these are matters for families to consider alongside professional advice, be it on the legal and tax side, whether that’s on the tax and trust side, whether that’s family lawyer or indeed corporate M&A lawyer. So we’re really set up to help our clients in family business context with that holistic framework. And hopefully all the listeners will agree with that.

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Thanks again for listening to this episode of Death & Taxes and everything in between, the Private Wealth podcast from Burges Salmon. You can listen to our previous episodes and get in touch with the team at Burges-Salmon.com or on our LinkedIn page. Keep an eye out for new episodes coming in 2025 focusing on individuals, landowners, business owners and trustees. Our specialist team will bring you our views on the new rules and their practical implications for clients. So don’t forget to subscribe.

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