Over the next 30 years, the UK will experience the greatest transfer of wealth in modern history, with £7 trillion of assets passing to the next generations. Family-owned businesses in particular, face the challenge of navigating the complexities of Inheritance Tax (IHT) and successfully transferring wealth to the next generations. Without advance planning, much of this wealth will be lost in taxes, with forced sales and liquidation of cherished family businesses.
Impact of Business Relief reforms
The October 2024 budget saw significant changes to Business Relief, effective from April 2026. Currently, trading businesses benefit from 100% relief, ensuring IHT free transfer. However, the new reforms will reduce this relief to 50%, resulting in 20% IHT on values exceeding £1 million.
This means, a £10 million trading company could create an IHT liability of £1.8 million for the family. If company assets need to be sold to generate funds for IHT, this will incur additional taxes through corporation tax on gains (up to 25%) and dividend taxes on extraction (up to 39.35%). Despite the reduced 20% IHT rate, the true cost could effectively be as high as 40% due to additional taxes. The most tax-efficient method to pay IHT may be to sell or liquidate the company, potentially ending the family business.
Challenges for property companies
The UK has seen a proliferation of property businesses. But property investment companies don't qualify for any business relief. Therefore, a £10 million property company could create a £4 million IHT liability. Due to the additional tax implications of extracting funds, liquidation maybe the only option.
Rather than the company sell assets (and generate tax on gains), a liquidation could be achieved by transferring out the properties to the beneficiaries, then sold as required with minimal Capital Gains Tax. However, this could also lead to stamp duty being payable, if properties are mortgaged. Going forward rental properties will be held individually by family members, which can be more costly than in a company wrapper.
Importance of planning
Thankfully, with advance planning these challenges can be overcome. Contrary to belief, for property companies too, there are wider options than life insurance to cover IHT liability.
Our top tips:
- Involving the next generation in the family business sooner ensures continuity.
- Restructuring shareholdings and gifting to the next generation during lifetime.
- Assess transferring ownership against capital gains or deferring with holdover relief where available.
- Using loan notes for transferring ownership can provide flexibility and liquidity.
- Weighing the benefits of giving up ownership versus retaining control.
- Considering retaining access to income from the business versus handing over control entirely.
With forward planning and holistic advice, families can prepare not just for managing IHT, but also for liquidity and tax efficient income options to fund lifestyle aspirations.
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