Business succession planning has always been important, to safeguard the business and, for example to ensure smooth handover of family businesses to the next generation.
Until now, owners have had the luxury of generous inheritance tax reliefs for trading companies, with the availability of up to 100% business property relief and a capital gains tax free uplift on death.
This has historically allowed business owners to “kick the can down the road” from a tax viewpoint, but as most people now know, all of that is about to change with effect from April 2026. From that date, the first £1m of business assets can be passed on tax free, but the balance will be subject to 20% inheritance tax.
Inheritance tax is therefore now a business-critical issue, and considering how to understand the impact for your business, and the options available to you needs to be started urgently.
What steps can be taken now?
- Gifts of shares can be considered, either outright, or to a trust. Making such a gift and surviving seven years (under current legislation) is effective IHT planning, but not a step to be taken lightly — the implications for the business and the family need to be carefully thought through. For example, in the case of an outright gift to a child, what might happen if that child gets into financial difficulties, dies or divorces? Expert legal and tax advice should be taken so that appropriate safeguards can be put in place. Where use of a trust is being considered, action before April 2026 could be vital to make best use of allowances.
- Consider transfers of shares between spouses, so that there are two £1m allowances available. However, again, legal advice should be taken, in particular from a family law solicitor, as whilst there can be merit in such a transfer for inheritance tax purposes, that has to be viewed in light of the potential impact of divorce/separation.
- Review wills to make best use of the reliefs which will be available.
- Consider how any likely inheritance tax will be funded. Will life insurance be available/viable? Is it financially viable for the company to buy back shares to pay the tax?
- Is a sale of the business the best option?
It is clear that detailed advice should be taken as soon as possible on the likely impact on your own business of the impending changes, so that any time-critical options can be considered and implemented before April 2026 — now that the end of 2025 is almost in sight, that date is not as far away as it seems!
