As attention grows on the impact of inheritance tax (IHT) changes on family farms, it’s vital to acknowledge that family-owned businesses, particularly those that are capital-intensive with modest incomes, will also be significantly affected by changes being introduced from April 2026 in relation to the IHT reliefs available for shares held by family members and intended to pass down to the next generation.
It is crucial for those business owners to act now and consider how to pass on their company ownership to the next generation before the changes come into force, reducing potential tax burdens and safeguarding the future of their companies for their family.
Current IHT Position for Private Companies
Under the current legislation, those holding shares in privately owned companies are able to benefit from 100% IHT relief on shares which they have held for two or more years when transferred on death. Notably, there is currently no upper limit on the value of shares that can pass to family members or into discretionary trusts, which can mean that the deceased’s estate can be spared a significant payment of IHT which would otherwise be due.
This allows business owners to maximise the available IHT reliefs across their wider estate. Shares held by family members can be transferred to their adult children or into trusts for underage children without incurring IHT liabilities at present. Furthermore, spouses enjoy full IHT relief when transferring shares between each other, ensuring wealth can pass across generations with minimal tax exposure.
What Will Change After April 2026?
Starting in April 2026, the rules relating to reliefs applicable to transfers of shares on death will undergo a significant shift. The 100% IHT relief rate will be capped and will only apply to the first £1 million of value of shares in a company. For shares which have a value beyond this threshold, only 50% IHT relief will apply, meaning IHT will be due and payable on any value above £1 million.
This change will affect transfers of shares to adult children or trusts which would otherwise have been exempt under the current rules, and although transfers of shares between spouses will remain IHT-free this will simply mean that the tax liability is deferred until the second spouse’s death when the above rules will then apply.
The change in rules is likely to result in substantial tax liabilities for many family owned companies planning on passing ownership down from parents to adult children to continue the family business. Consequently, those inheriting the family business will face higher IHT bills when ownership is transferred to the next generation, especially once the value exceeds the £1million value threshold.
What Business Owners Can Do Now to Mitigate IHT Impact
Although the changes do not come into effect until April 2026, it’s vital for business owners to start planning now to mitigate the potential impact of the changes on their IHT positions, especially as the process of transferring shares can take time to plan and implement correctly. It is key to engage with the right professionals to ensure that the correct strategies are adopted, accurate valuations obtained and legal processes followed.
Whilst not exhaustive, there are a number of options that business owners can consider to help reduce the potential IHT exposure:
1. Lifetime Gifts and Trust Transfers:
Gifting shares during a business owner’s lifetime remains one of the most effective ways to mitigate IHT. By transferring shares to family members or trusts before April 2026, owners can lock in current reliefs and lower the overall value of their estate. For added tax benefits, particularly for younger business owners, it is worth considering gifting the shares as if the donor survives for seven years post-transfer the gift will be excluded from IHT calculations.
2. Life Insurance to Cover IHT Liabilities:
Purchasing life insurance policies can provide a safety net to cover potential IHT liabilities. This strategy ensures that the family won’t have to sell the business or suffer additional stress in finding funds to pay the tax bill at what is likely to already be a very stressful and emotional time.
3. Restructuring the Business:
Business owners may also consider restructuring their businesses to reduce the value of shares which will be subject to IHT. Methods such as transferring assets or creating different share classes can help minimise the potential tax impact.
4. Family Buyout:
A family buyout could be an effective strategy to transfer ownership and allows the business to remain in family hands. A lifetime buyout will remove the shares from the estate and transfer ownership to the next generation smoothly, giving the owners a financial payout for their retirement or to reinvest into the company to reduce the value of their estate for IHT purposes.
5. Sale to Third Parties or Employee Share Schemes:
If family succession isn’t viable, perhaps because the wider family or next generation do not want to continue the business, then selling the business to a third party or implementing employee share schemes are alternative options to transfer ownership during the owners lifetime. These strategies offer business owners an exit route while reducing IHT exposure.
6. Consider Moving Abroad:
While it might seem extreme, for those business owners who have no family to pass on their business to, or who wish to retain control of their company to provide an income for their retirement without being involved on a day to day basis, planning to relocate outside the UK may be another option to consider to mitigate their IHT liabilities if the business is sold after moving abroad, provided they remain outside the UK for at least five years.
Start Planning Today for the Future of Your Business
With the IHT changes on the horizon, the time to act is now. Proactively planning business succession, exploring restructuring options, and implementing tax-saving strategies will help mitigate the impact of the new rules on your estate.
Contact us today to discuss share transfers, business restructuring, and options such as sales, buyouts, or transfers of shares into trusts. Our private client team is also available to assist with IHT planning and ensure your Will is updated in preparation for the upcoming changes.
By acting now, you can safeguard the future of your company ownership for the next generation and prevent unnecessary tax burdens for your family.
